Mistakes of the young rich

If you are young, rich and self-made, you are walking a tightrope. What drives your success can also cause your failure. By JAMES THOMSON.

By James Thomson

If you are young, rich and self-made, you are walking a tightrope. What drives your success can also cause your failure.

To make a multi-million dollar fortune before you turn 41 requires some special characteristics – supreme confidence, persistence, aggression, a willingness to take some very big risks and an ability to grow a business faster than seems possible.

Unfortunately, these are the exact traits that can also bring a young entrepreneur crashing down.

It is little surprise then that Australia’s richest entrepreneurs 40 years and under have seen some spectacular falls from grace.

When property developer Kovelan Bangaru hit BRW’s Young Rich list in September 2004 with a fortune of $31 million, he was developing 300 to 400 properties each year around Sydney. In August 2004 he sold a luxury apartment at The Cove in Sydney’s Rocks district for $16.1 million.

But by the middle of 2005 things were unraveling. Nine Network’s 60 Minutes program ran an expose on Bagnaru’s property dealings and in July 2005 he put some of his companies into voluntary administration.

Then in mid-August, Bangaru fled Australia, leaving behind debts of $63 million and a lot of angry creditors. Bangaru was arrested in the United States in April this year and will be returned to Australia to face prosecution by the Australian Securities and Investments Commission.

Some people who suffer a financial collapse are visionary business people whose company grew a little bit too quickly. Nick Noutsatos was one of these.

In 2003, he had a personal fortune of $54 million, made up almost entirely of shares in his company Sam’s Seafood. Noutsatos, who started the business by selling fish out of the back of his van and at Brisbane markets, built Sam’s into a Brisbane institution – it seemed the whole town would queue at the company’s big inner city store on Christmas Eve to get prawns for the next day’s barbie.

In 2001, Noutsatos floated Sam’s against the odds. He had been unable to persuade an investment bank to underwrite the share offer and did the entire thing himself.

He celebrated on the day of the float by defiantly sailing a Sam’s Seafood boat up the Brisbane River. Initially it looked like the gamble had paid off – the shares surged from their issue price of $1 to a high of $5.34 in November 2004. But then things started to go badly. In 2003-04, revenue rose 25% but profit fell 14.2% – a classic sign that the company was struggling to cope with its rapid growth.

Then came the fatal mistake. Noutsatos announced plans to start franchising fish and chip stores. But rather than testing the market with a few stores, he opened 16 within the space of 18 months. While Noutsatos was clearly a brilliant wholesaler, he had little franchising experience. By May 2005, Sam’s Seafood was in receivership, and in early 2006 Noutsatos declared himself bankrupt.

Noutsatos was fond of saying that he lived to prove people wrong. “If someone tells me I cannot do something, I can’t sleep until I’ve done it,” he said in 2004. While every entrepreneur must be able to persist in the face of doubters, they also need to be careful to listen to those helpful advisers that warn against growing too fast, too soon.

Mark Fawcett was one of the feel-good stories of 2005 when he debuted on the BRW Young Rich list with a fortune of $15 million. Not only was his company Herd Bars and Bodies operating in the regional town of Wollongong, but he was also starring in the old-school manufacturing sector.

In 2005, Herd – which made bullbars, canopies and trailors for large vehicles – was valued at about $4 million, employed more than 120 people and had a thriving United States operation. Fawcett (who also owned a substantial property portoflio) said the company would soon have revenue of $50-$100 million.

But in March 2006, Fawcett started laying off workers. His handful of contracts were simply not bringing in enough work. By the end of the month Herd was in receivership. The feel-good story turned very ugly for Fawcett’s employees.

The big mistakes of young rich entrepreneurs

1. Borrowing too much money.
2. Promising customers and investors more than you can deliver.
3. Not having the people, processes and systems to absorb rapid growth.
4. Straying too far from what you do best.
5. Becoming too reliant on a small group of customers.

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James Thomson is the former Young Rich List and Rich 200 editor at BRW, and will now write regularly about wealthy entrepreneurs for SmartCompany.