Building on Bedrock

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Building on Bedrock Page 22

by Derek Lidow


  I took out a second mortgage on our house, which bought me some more time, but ultimately I had no alternative but to convince our VCs to invest more money. Getting someone new to invest wouldn’t work because any new investor would want to go to the head of the line in recovering their investment. The existing professional investors would never agree to give anyone else more favorable terms than they had. Fortunately, iSuppli had continued to grow right through the dot-com bubble and the ensuing tech chaos, so the company still had value. It didn’t make sense to let it collapse, although logic does not always drive decisions relating to money, power, and status. The negotiation with the VCs was painful and humiliating. I had to agree to my previous loans and investments being wiped out in order for iSuppli to be given three loans with extremely high interest rates that increased with time. We could pay back the loans only if we kept growing as fast as we were, and with no further investment. Paying back the loans in a timely fashion was practically impossible, but accepting the terms was the only viable alternative I had—and the VCs knew it.

  iSuppli did continue to grow quickly, and we used much of the loans to finish building out several valuable new data services that further accelerated our growth. The loan package not only saved the company and everyone’s jobs, but also worked out for me personally. By previously agreed-upon rights as the largest investor, I had to be given the opportunity to be part of the loan syndicate. I didn’t have the money to participate at first, but IR’s stock price soon recovered, making my options valuable again, so I was able to participate in the last two loans. Those loans carried the highest interest rates, which yielded me some decent returns when iSuppli was sold a few years later for $100 million.

  I didn’t let iSuppli fail because I couldn’t face my perception of the consequences of defeat, while I could in the case of Table of Contents. Nobody realizes that the answer to “when to throw in the towel” is actually already made for you when you decide to commit to founding your company. I founded Table of Contents to validate myself as a “businessman” who knew how to create new business opportunities. I could not therefore let my startup drain my wealth if I wanted to continue to consider myself a good businessperson. By the time I started iSuppli, a decade after starting Table of Contents, my core motivations had shifted. I had proven to my satisfaction that I was very good at leading large global and complex businesses through difficult times while still capturing major opportunities along the way. IR was doing better than it ever had in its history despite intense global competition and very turbulent markets. By the time I started iSuppli, I wanted to prove I could create significant value on my own, free of family legacies. I could therefore not quit, no matter the financial impact, until the question of my ability to create value was resolved one way or another. I certainly wasn’t going to let the existential crises I just described take me down—they were merely challenges I had to figure out how to overcome.

  When entrepreneurs ask me the “when to quit” question, what they are really asking for is reassurance from a higher authority of sorts that their personal quest remains valid. The challenge most entrepreneurs face is that they do not understand their real motivations for having embarked on their quests—otherwise, they would already know what to do next.

  The real question is therefore not when, but whether.

  * * *

  [21] My experiment with founding Table of Contents happened about five years before I was made CEO of IR. It was an early reflection of my inner desire to do things my way—even though only as a hobby and with a startup that was run by others.

  CHAPTER 11:

  Whether

  The question of whether you should become an entrepreneur, or whether you should invest in your nephew’s startup, is an existential one: Do you want to take a journey that you can never be totally ready for? We’ve discussed how you can best prepare:

  Make sure you will actually feel happy in making other people happy and asking for their money in return.

  Make sure you’ve accumulated “enough” of the essential assets to start.

  Make sure you’re “good enough” to compete in an entrepreneurial league you will feel satisfied playing in.

  Of course most entrepreneurs have never considered these prerequisites, and most entrepreneurs have failed. This book cannot offer anyone a magic formula, just essential facts and good examples. Unfortunately, meeting the criteria outlined here still does not guarantee success. It merely increases your odds of success—or, put another way, it reduces your risk of failure. Checking off all the boxes of motivations—a happy-making idea, adequate skills, and adequate assets—does not necessarily mean you should try starting your own company. Conversely, not having everything lined up doesn’t preclude entrepreneurship from being the best move for you. Not even a crystal ball can adequately answer the question of whether. The more pertinent question is how the entrepreneurial journey will make you feel—and make the people you love feel—irrespective of how it ends. And since the journeys of high-risk and bedrock entrepreneurs are so different, the question of whether is also a question of which mode of entrepreneurship is best for you.

  The first decade of Jordan’s entrepreneurial career was glorious for him. In that relatively short time, the Sausage Kingdom had grown to providing sausages at dozens of airports, all southern California sports stadiums, at two of the most popular tourist destinations in the world, and to many fast-growing national food retailers like Trader Joe’s and Costco. Along the way Jordan encountered plenty of challenges and crises (many, as we’ve seen, avoidable), but he was making more money than he had ever dreamed. At this point some entrepreneurs think about cashing out while they’re ahead, but for Jordan, his Sausage Kingdom was now his life and nothing could make him give it up. What was impossible for Jordan to realize at the time was that the magnitude of his mistakes would grow with time because his skills and those of his team where not keeping up with his opportunities.

  Jordan’s eleventh year of business started with a call from the president of the Portland Trailblazers. The Trailblazers’ president and Paul Allen, the owner of the basketball team and the retired co-founder of Microsoft, were such huge fans of Jody Maroni sausages that they offered him a prominent space in the shopping mall Allen was building next to Portland’s basketball arena. Jordan’s space was to be a fancy restaurant that served interesting sausages and featured a full bar. The thought tantalized Jordan. He could go upscale and become a major restaurateur—this would open up even more avenues for people to love him.

  Jordan spent well over a million dollars of his own money to create a beautiful upscale beer and sausage restaurant. But people came to the mall only during basketball season—for over half of the year, Jordan’s restaurant was empty. The entire mall was a financial disaster. Paul Allen could afford his losses, but almost all of Jordan’s savings were wiped out. Still, profits were coming in from Jordan’s other businesses, and he had successfully outfitted a larger factory and warehouse for all the business that Costco was bringing to him. With positive cash flow, Jordan felt growing the Sausage Kingdom as fast as possible was still top priority. He opened up more sausage stands in some smaller airports on his own, and he started to franchise Jody Maroni’s Sausage Kingdom to several dozen individuals who had been soliciting him for the opportunity. When 9/11 hit, however, the airports and tourist venues where many of his storefronts were located emptied out and a large fraction of his franchises were put out of business, leaving him with big bills and no cash flow.

  To make family matters even worse, his wife’s stepbrother, who was upset because Jordan had never given him a job or listened to his ideas, started a rival sausage company. Jordan sued the brother-in-law, sending the family into further chaos. Within a month his wife left him. Ever sensitive to the people he loved, Jordan rented a house near his wife and kids, taking on additional expense to make it feel as if their family still worked.

  And then Costco, Jordan’s largest custome
r by far, started pressuring him for major price reductions. Jordan had bought and outfitted his new factory in order to accommodate the Costco business, and he still had big bills to pay for it. He felt insulted. After a year of haggling, Costco cancelled all their orders and went with a new vendor of specialty sausages who had copied Jody Maroni’s flavors but used less expensive ingredients. Without Costco, the new factory was a financial disaster.

  On top of all this, some of Jordan’s franchisees were doing poorly, and without proper supervision or support, they began playing around with the franchise formula and skimping on quality. For the first time, Jordan received letters from customers upset about their experiences eating at Jody Maroni’s Sausage Kingdoms.

  For the next four years, Jordan was forced to lay off employees, close the new factory he outfitted to serve Costco, and close the new stands he had opened that were losing money. Because Jordan was afraid people would stop loving him for making the cutbacks, he procrastinated with his cost cutting, requiring him to borrow money to stay afloat.

  At the end of the four years of cost cutting, the Sausage Kingdom finally started to make money again, and Jordan felt he could rebuild. But he sensed he should get professional help for his second attempt at growing his company. He wasn’t confident anymore about his ability to put together franchising agreements or to pick franchisees, so he hired a headhunter to find him somebody who could reinvigorate growth through franchising. Recruiting proved to be more difficult than Jordan expected. Most experienced franchise executives weren’t interested in working with him. One executive who was interested had food service experience but only limited franchising experience. Jordan still agreed to make him president of the company. The new president proceeded to borrow money to create logistics infrastructure, and he sold franchises to bar owners he knew who thought that good-tasting sausages would enhance their liquor sales. But the new president’s inexperience at overseeing logistics infrastructure resulted in systems and software that didn’t work properly, leading to additional losses. Some of the new franchisees began to default on their payments because their bar business did not increase as expected. Watching the losses mount up quickly, Jordan realized that his president had no idea how to fix the problems his decisions had caused. Jordan fired him. But the damage had already been done. With significant debts to pay, Jordan had to shut down the franchising operation a second time. He is still paying off those debts. He runs his original Venice Beach location and lives above the stand. He’s revered by the other merchants of Venice, and referred to as “The Bard of the Boardwalk.”

  Jordan Monkarsh thinks a lot about whether he should have started his Sausage Kingdom. He broods about what he could have done differently: selling the Sausage Kingdom at its peak, hiring more experienced people to help him, or just asking for advice. But while those closest to Jordan no longer view him as a successful entrepreneur—he didn’t hold his sausage empire or his family together—he feels good about most of what he’s done: he made millions of people happy with the best sausages they’d ever tasted, he employed thousands of people, and many people loved him for what he did. He remains a hero to the small team that still works for him, and he revels in the attention and respect he receives from his loyal fans that still come to the Venice Beach Boardwalk just to satisfy their sausage habit.

  Sure, asking for advice and mastering business and leadership skills early on rather than after the fact would have served Jordan well. But Jordan still did a stupendous job of taking an idea and growing it relentlessly into a big, profitable business, even though it doesn’t feel like that to him now.

  Every entrepreneur is challenged to question their motives and methods at points along their journey. Building a business, whether it’s enormous like Walmart, or small like 1-800-AUTOPSY, is always, always stressful. And it is always hard work to create a business that makes large numbers of customers happy. All entrepreneurs, no matter how successful they ultimately become, get irritable and even depressed sometimes. Many entrepreneurs reach the point where they wonder whether they’ve made the right decisions in getting to where they are. That’s when they should remember what they do to make others happy, and ask themselves how there might be more happiness to give. Jordan asked himself that question repeatedly, and it served to drive him forward. If the answer to this question loses its interest and excitement—if there seems to be no more happiness to give—then it’s time to stop the journey and sell or close the business.

  Today Jordan spends most of his spare time reading books on anthropology. For Jordan, reading about other cultures is as captivating as reading a thriller is to the rest of us. And Jordan looks forward to the hours he spends with his kids and grandkids. He’s a happy guy, he’s created lots of happy people, and sausages are much more interesting to eat because of Jordan. No one can justify thinking that Jordan should have ever quit while he was ahead.

  Rags-to-riches-to-rags is a common story among entrepreneurs. Like Jordan, most entrepreneurs who do very well at some point are unable to sustain their peak value creation. Competition, business conditions, and customer desires are constantly changing. Staying focused for long periods of time is extremely difficult. About two-thirds of the businesses on Inc. Magazine’s annual list of the top 5,000 fastest-growing private companies in America either shrink or are sold disadvantageously after making the list. Success must be constantly won and re-won.

  Jordan’s story provides a cautionary tale about fundamental mistakes initially successful entrepreneurs can make. But it’s also a meditation on whether the risks of entrepreneurship are worth taking and about what really constitutes entrepreneurial success. Is it starting an innovative company? Is it creating a profitable company that supports the entrepreneur and lots of employees while making customers very happy? Is it creating a company that lasts forever—or at least longer than a generation? Is it proving to your dad that you’re good at something after all? Is it doing something that makes you happy, regardless of what a parent or others might think? The answers, as the stories of Sam, Walt, Estée, Ray, Jordan, Stephanie, Vidal, and Ken demonstrate, depend upon why you started the company in the first place—what you needed to prove to yourself by embarking on such a journey.

  Because the journey is unpredictable, the key is preparation. Preparation, the subject of this book, minimizes entrepreneurial mistakes. You prepare yourself for your journey by:

  Focusing on your motivations (Why)

  Accumulating needed assets (How Much)

  Mastering essential skills (How To)

  Choosing where and against whom you’ll compete (How Good)

  Everyone profiled in this book prepared to some extent, and in every case the extent of the preparation largely determined how the business wound up. So the question of “whether?” starts with a direct question to every entrepreneur about whether they have prepared. No? Then don’t do it!

  Assuming you have prepared, then the question of whether becomes the question of whether to go high-risk or bedrock. Consider the starkly different characteristics of bedrock and high-risk entrepreneurs.

  Bedrock High-Risk

  I want to reduce risk of personal loss (money, status, relationships). I want to maximize personal gain (money, status, networks).

  Slow and steady wins the race. Shoot for the moon and fail fast.

  I can’t afford failure nor can I justify it to those who are hurt by it. Failure is a learning experience.

  I will build my business with profits. Use as much of other people’s money as you can get.

  I measure my success based on achieving my personal goals. I will build a valuable business by growing my stock price.

  Partnering with strangers is risky and should be avoided. Partnering with strangers is less risky than not having enough money to invest.

  These are contrasting mindsets that lead to two dramatically different entrepreneurial journeys. Bedrock entrepreneurs come to understand that they succeed because of their personal a
bility to make their customers very happy—and to ask for money in return—and their ability to rally other people to help them do that. Because their journey is personal, failure is personal. Bedrock entrepreneurs therefore avoid unnecessary risks and invest time and effort to minimize risks associated with the steps they must take.

  Many high-risk entrepreneurs feel the same way and only choose that path because they believe they cannot otherwise compete in the business they’ve chosen. Certain types of businesses are by their very nature high-risk and entrepreneurs that feel comfortable with risks do have an advantage when starting these companies. Businesses whose competitive advantages come from creating network effects or being first to develop the economies of scale to bring costs down to massively affordable levels require high-risk entrepreneurs and savvy venture capitalists. Businesses that are highly regulated and require years of testing, such as pharmaceuticals and medical devices, require large amounts of capital to support, and may also require a high-risk approach to be feasible.

  But some high-risk entrepreneurs choose their path not because of need, but because of mindset. To some entrepreneurs, high risk connotes high return, perhaps because they think risk is related to return. But the economic theories of risks versus returns only apply in the aggregate across perfect markets with large numbers of buyers and sellers of well-defined units of risks, as with a specific stock or bond. High risk does not mean high return for an individual entrepreneur. The link does not even apply across the portfolio of most venture capitalists, since most VCs return to their investors much less money than would be expected for the added risk. Further, as we have seen with Sam Walton and Estée Lauder, high returns can ensue from taking small risks, particularly when the small risks yield information directly related to how to improve returns with almost no risks.

 

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