Startup Wipeout

Cautionary tales of small business failure

Sample chapter

Fools Rush In

There is more to life than simply increasing its speed ― Mahatma Gandhi

Entrepreneurs come from every imaginable background, but most have one thing in common — they’re in a hurry. A big hurry.

First to market, pioneering advantage or early mover, few want to come in second. Forgetting that Microsoft’s Bill Gates said “I want to be last,” most want to see their vision come to life immediately, preferably yesterday.

In reviewing my startup relationships over the years, the best fast start that I ever saw for a brick and mortar business was 14 months from ‘good idea’ to ‘doors open.’ Twenty-odd months was much more common and three years was not unusual. Three years might seem like forever, but a successful venture will have a long life and three years is only 36 months.

Digital, virtual and online businesses can ramp up much faster, but time is seldom your real enemy — haste is the hunter.

While this focus on first has certainly driven a few startups to great success, haste really can make waste. Makes waste, or rather lays waste, to many an otherwise viable venture. In this abbreviated sample chapter, we’ll look at two examples of leap before you look.

* * *

“It seems like a perfect match!” Julianna exclaimed as she described her new business partner. “Now that I’ve come into a little money, I can finally get out from behind that desk and do what I really want to do. I’ve been in love with the restaurant business since I was in school and Richard has been a chef in some of the best restaurants in town. With my investment and Richard’s restaurant experience, we can’t lose.”

There’s no question that industry specific expertise is critical for startup success and any lender or investor will demand industry experience before considering funding most ventures.

In Julianna’s case, the industry she chose has a frightening failure rate — as in nearly 100% — especially over the long haul. Corporate restaurants, with better management, more resources and more units to carry momentum, usually do better than a single outlet.

In either case, the restaurant industry is a brutal siege of escalating overhead, endless staff issues and a fickle public. Worse, there is no lifeguard at the restaurateur gene pool. Neophytes who dive in find that there is only a deep end and few return to the surface.

Juliana had a business background and money to invest. Richard had the deep industry experience essential for success. What could possibly go wrong?

While this duo appears to be a good recipe, there is an underlying problem that is so common we have a name for it. The startup wipeout here is called an ‘unbalanced partnership.’

An unbalanced partnership arises when one partner brings a common resource, like Richard’s chef experience, and the other partner brings something extraordinary, like money. Don’t think money is extraordinary? Go try to borrow some to start a restaurant!

Assuming that Richard’s chef experience is all that he says it is and assuming that Richard will apply himself 110% to this venture, Richard and Juliana still face an irrefutable fact.

Richard’s chef experience is as common as mud and Juliana is bringing something remarkable — money. Money is very interesting. Money can be a substitute for all kinds of things, but we’ve yet to find a substitute for money.

Juliana and Richard created an unbalanced partnership because when the restaurant fails, Richard can go get another restaurant job and will be financially unaffected by the failure. Juliana will lose all of her investment and will probably face debt — money and reputation lost.

Earlier we gave Richard credit for giving 110% effort to the restaurant, but here is where we find another flaw in the unbalanced partnership model. Without the prospect of equal pain, can we expect equal effort from a partner with very little to lose?

Bankers call it “skin in the game” and it’s all about commitment. An unbalanced partnership will mean unbalanced commitment. Unbalanced commitment is known to cause a tremendous amount of stress in any relationship. In our story above, Richard made a contribution where Juliana made a commitment. I once heard a very colorful description of the difference.

“Let’s say you had bacon and eggs for breakfast this morning,” a grizzled sales manager once told me, “the chicken made a contribution — the pig made a commitment!”

Unbalanced partnerships come in many shapes and sizes, but all have the same outcome. How can you identify an unbalanced partnership? Imagine the business fails — who moves on to the next venture unscathed and who takes a beating? Who is the chicken and who is the pig? Unless all partners have approximately the same pain in the end, an unbalanced partnership virtually assures a startup wipeout.

* * *

In our next tale, it was a missing written agreement that wiped out this startup. A group of talented people jumped into an exciting project by bringing together a wide range of skills. Success seemed assured and time was of the essence, or so they thought.

Brandon was walking on air as he strode into my office to tell me about his new venture. “Nailed it,” he told me, “put together a winning team!” While a comparatively diminutive figure, his close-cropped hair and trim fitting clothing defined his own dimension. Brandon always stood out from his surroundings.

“Ashley has three titles listed in the app store already, so she has that. Tran is a user interface whiz and I’m Mr. database. Can you say successful?” Brandon asked me as he sat down.

Brandon described how his new team was going to take on the then-emerging app market. Instead of seeking investors, the team created an app development budget. Each made a one-third budget contribution to their newly formed LLC.

“It was a snap,” Brandon reported. “We went online to the Secretary of State’s office, clicked a few boxes, handed over the registration fee and we’re in business.”

There was one important item I hadn’t heard Brandon mention — an operating agreement. Operating agreements provide the rules for answering the kinds of questions LLC owners will face. Who owns how much of what? How are revenues distributed? What if an existing member wants to leave? Does a new member wish to join? What happens to the assets if the members dissolve the LLC?

An operating agreement isn’t often available from government incorporation websites. What is available isn’t specific enough, so drafting a useful agreement is the responsibility of the owners of the LLC.

“Will you three take a minute to put together an operating agreement before you get too far down this road?” I asked. “I’ll put Ashley on that,” Brandon said as he was leaving, “she’s good at process.”

I didn’t hear from the app team for quite a while. Ashley sent me an email to ask for a template for that operating agreement and Tran called with an expense allocation question, but I didn’t hear from Brandon again.

I ran into Ashley at a tech conference about 18 months later. Ashley was easy to spot in a crowd. She went to college on a basketball scholarship and her long blond ponytail looked like an exclamation point. “How’s the project?” I asked as we walked down the hall.

“I blame myself,” Ashley said, as she slumped onto a slim bench against the wall, “I said I’d get the operating agreement together…”

Ashley held both hands up, palms facing me, “Erase that, it was all of us… but it was the worst for Brandon… he moved to Boston...”

Ashley told me that the app came together quickly but after release, there were problems with the database. The problem? Their success — the app was far more popular than the team had ever dreamed possible. Unfortunately for Brandon, the fix required a major database rewrite. Being the only database developer on the team, Brandon put in weeks of additional development time.

“We got bought out by a big developer group, which was good,” Ashley said, looking at the floor. “We fought over the money, which was bad. We all put one third in, we all got one third out — that’s what the lawyer told us.”

Ashley stared into the passing crowd as she continued, “Brandon became angry, said he did ten times the work and only got his one-third share. Tran said his user interface was the only reason we got bought out. Tran called Brandon and me a couple of amateurs. They both went after me for having no operating agreement…”

“The thing is,” Ashley said, the corners of her mouth curling down, “every time I brought up the operating agreement there was a fight so… I don’t know… and Brandon... Brandon’s in Boston...”

In this sad case, each partner entered into this agreement with a completely different understanding of one-another’s contribution and expectation of reward.

I sat down next to Ashley to share some advice for future projects. “There will always be challenges when putting together a complex agreement, Ashley, but you three learned a hard lesson.”

“What?” Ashley asked tersely, slinging her conference swag bag strap back on her shoulder as she prepared to leave.

“When it comes to several people hammering out an agreement over important issues,” I advised, “it’s fight me now or fight me later. The hard lesson here is that the longer you put it off, the more contentious the relationships become.”

Ashley stopped for a moment and set her bag back down on the bench. “Know what, Kev? Knew that. Knew it and buried it. Tried to go along to get along. Blamed myself. It wasn’t all me. Brandon blamed me, too. That’s what hurts the worst…”

Ashley slung her bag strap back on her shoulder and gave my arm a squeeze with her free hand. “Thanks, Kev. I buried it. You dug it back up. I get it. Won’t bury it again.”

Ashley turned to leave, and I grabbed my conference bag off the floor. With her long-legged stride, Ashley was out the door and gone when I looked up again.

* * *

A long journey greeted the central character in our last tale of this chapter. Eventually rewarded for her caution and patience, Azra’s path was perilous, indeed.

Azra was passionate about cooking and even more passionate about fresh ingredients. “Well, there’s really no comparison,” Azra told me, “when you use fresh, the flavors just leap out of your meal and explode in your mouth. It’s just the best!”

Azra was a bundle of energy during her office visits, always sitting on the very edge of a chair, lifting her feet in excitement as she described her ideas and occasionally knocking her battered aluminum water bottle off my desk with a hand gesture.

Azra’s passion for fresh food led her to cultivate her own herbs for cooking. She was soon giving fresh cut herbs to her friends and neighbors to support her fresh ingredients evangelizing. Azra’s business idea sprung from their interactions over herbs.

“Well, she’s telling me I should start a business and sell herbs to passionate cooks and to restaurants,” Azra said during our first meeting. “Just how would I go about doing that?”

After we discussed startup basics and food business issues, Azra left to pursue her passion and her cautious journey began.

“Well, I just need to remember that this is a marathon and not a sprint,” Azra told me, as she shared one of her many setbacks. Azra made her comment about “a marathon rather than a sprint” during her third visit to my office. We started our discussion in early spring and by now the leaves were off the trees and winter was coming fast.

Azra’s first challenge was locating her growing facility. She had hoped to add a greenhouse to her own property in the county. This approach would allow Azra to operate under the auspices of a farm store. Using a facility on farm property where a producer sells its own production was attractive because of the minimal regulatory requirements.

The county planning commission posted Azra’s land use request, and an avalanche of objections poured in. Concerns ranged from view obstruction to traffic issues to fears of the spread of herb seeds to neighboring properties. As easy as it might have been to mitigate these issues, Azra wanted to keep the peace within her home community.

Moving production to commercially zoned property eliminated land-use issues. Unfortunately, this move brought a whole slew of regulatory issues, as Azra was no longer using the farm-store approach. State Department of Agriculture inspections, labeling requirements and compliance with Weights and Measures took until the following spring.

In between appointments with inspectors and compliance officers, I encouraged Azra to find markets for her future production. “Well,” Azra asked, “just where do I start?”

We discussed early stage marketing approaches and building a forward-looking pipeline. This prospective customer base would help Azra establish an understanding of future demand as she started production.

We also discussed priority buckets so Azra could prepare to identify her ‘A, B and C’ product and customer categories and plan her development accordingly.

What is the A, B and C process?

‘A’ products are very profitable products that don’t have quite enough demand to sustain a business.

‘B’ products are products with an acceptable profit margin and adequate demand.

‘C’ products are low profit, low demand goods or services that are sometimes still necessary to be seen as a viable market participant.

The same is true of customers, from the most desirable (and often rare) ‘A’ customers to the acceptable and more common ‘Bs’ and down to the ‘Cs,’ low volume, inconsistent buyers or slow payers that should be avoided.

The following spring (a full year since our first meeting) Azra returned for a check in. “Well, the good news,” Azra said, as she ran her fingers through her close-cropped hair, “is that I’m planting my first crop in the greenhouse next week. Just never thought that day would come!”

The second bit of good news was that, since Azra had made her advance sales calls, she was already drawing up plans for second and third greenhouses.

“Well, I’m just so glad I just held off after the planning commission told me about the neighborhood complaints and just made a new plan. I would have just only had room for just one greenhouse on my property and, well, I’d just be stuck in meeting my new customers’ needs.”

Azra entered a marathon, and it looks like she’s winning the race.

Patience, persistence and perseverance pave a proven path to prosperity!

* * *

But wait, there’s more!

If you enjoyed this sample reading, be sure to visit kevinhoult.com to see future books coming soon.

My next series, titled Seven Secrets, will share what my clients taught me about starting and running a successful small business.

Be on the lookout for:

• The Seven Secrets of Small Business Success
• The Seven Secrets to a Winning Business Plan
• The Seven Secrets of Getting Money to Start
• The Seven Secrets of Neutralizing Negative Reviews

And many more, coming soon!