Starts and Ends
Hey there, my fellow small business owners. What is your startup story? For most of you I’m guessing that your story didn’t get written up in the Wall Street Journal, Inc. or Fast Company. The startups that make the news tend to be the VC funded high tech cool new software-as-a-service businesses that don’t make money until they’ve been in business for several years.
And just as these news-making unicorns have amazing funding stories, they equally have big name founders and investors who are well connected in the world of Silicon Valley funding. Sure, there are some VC firms in the flyover zone of the country, but they are still few and far between.
But today’s topic isn’t about the VC-funded firms, the SPACs, the IPOs and all the businesses that make the news. Today’s let’s talk about the everyday entrepreneur. Those like you and me – who funded their startup with personal savings, a home equity loan, or with credit cards (not recommended, but I’ve worked with some who did that) or by any of the other bootstrapping methods that so many of us relied on to start or purchase our businesses.
As a matter of fact, only about 0.05 percent of small businesses are funded by venture capital. They may attract the majority of the news stories, but they certainly are nowhere near the norm. What is the norm? Over three-quarters of new small businesses are self-funded, and about a third of small businesses are able to get started with $5000 or less.
In reality, there are more of us than there are of them.
People who worked for a big company and thought, I could do a better job than this.
People who solved a problem they had and then figured others might have the same problem.
People who have a service to offer and knocked on enough doors to round up some steady work.
People who took over a family business with a vision of new products and services to grow the company.
In my opinion, these stories are just as interesting as the SPAC, VC, tech founder stories.
Start-ups and Wind-downs
Every founder took a leap. We all made a decision that we want to control our own destiny and career path. We took on the burden of dealing with health insurance and benefits (or lack thereof) and took the chance of giving up our W2 income for the opportunity to make something on our own with no guarantees. All of our stories deserve to be celebrated and shared. Some have turned into a great lifestyle business. Some will be handed down to the next generation. Some will get sold. Some will merge with similar or complementary businesses. And some will fail.
Just like the startups that are funded and launched with scores of VC funds make the news, the failures of these expensive startups also make the news. But what about the everyday entrepreneur failures?
Data shows that about one in five businesses fail within the first year, and about half have failed by year five.
These everyday entrepreneur stories of our failures also deserve acknowledgement.
Who among you had a great idea that never quite turned into anything? Or a business that started off well, but slowly declined? Or a plan or a product design that needed more funding, more design work, more technology, more something than you could offer and didn’t ever fully get off the ground?
We all take chances when starting a new business and sometimes it works out and sometimes it doesn’t. There are all sorts of articles and studies on the reasons for failure, which can include lack of customer validation, lack of funds, bad timing, marketing issues, team issues, technology issues, and so on. But just like every start-up story is unique, every failure is unique as well.
This is my story
My business partner and I had been consulting with entrepreneurs for about five or six years when we started working with an engineer who had designed a really cool new product. He had patents on the technology and had won some business plan awards in the area already (partly thanks to our business planning services!).
We could see that this business owner and his partner knew how to handle the hardware and software side of the business, but not the marketing, operations, or financial pieces. And we were pumped about the product. So, we took a chance, invested our own money, and bought into the business.
What was the technology? Picture this – you have a rental mailbox for your small business or association. You rent it through USPS maybe, or perhaps The UPS Store or PakMail or one of the many package shipping and mailbox rental stores located all over the country.
But how do you know when you have mail in that mailbox? The only way to be sure is to drive to the store and check your mailbox. This can be frustrating and time consuming. Do you check once a month and hope you aren’t leaving money or an unpaid bill sitting there? Do you check every day and waste your time when you open an empty mailbox?
Enter our product. A sensor that gets mounted inside the mailbox that is constantly looking for the presence of mail. That sensor then communicates with a custom router to indicate Mail or No Mail. When the signal changes to Mail, it triggers an email or text message to the mailbox renter. Voila!
Answer Mailbox Was Born
The technology worked great but the sales and marketing needed help. So, my business consulting partner and I set aside our existing business to jump in and make something of this venture by buying in as owners. We had a buy-sell agreement, agreed on ownership amounts and investments and all four of us were excited for the opportunity to see this grow.
We invested money in developing a user-friendly interface for the mailbox customers and the store owners offering the service. We set up test markets in a variety of locations across the country. We made instructional videos, designed a new logo, set up a website and a toll-free number. We attended mailbox center trade shows (yup that’s a thing), wrote articles for the trade journal, and worked hard to generate interest. We had mini tape measures for trade show giveaways printed up with our company logo.
The mail centers loved the idea, especially since they could embed some advertising messages into the “You have mail in your mailbox” message. (We couldn’t use the “You’ve Got Mail” message – trademarked by AOL!). Bear in mind that this was over 10 years ago, so the technology was pretty sophisticated for the times.
Things were looking up. We had people interested, we were looking into manufacturing more of the sensors to meet the interest from our test sites who were starting to pay for the service, and we were looking at office space. We knew we’d have to make a bigger investment to finalize the design of the sensor and increase our production volume.
We met with a potential investor who said that he needed to see more revenue than our few test sites and a more user-friendly sensor before he would consider putting money into the business. Essentially, he felt we were still in the “friends and family” or self-investing stage of our startup.
At the same time, the engineer who invented the patent took a job across the country and our meetings went from in person to Skype. The combination of these two things eventually led to our downfall. My consulting partner and I wanted to invest more of our money in the business to get it to a stage where we could really grow. But we wanted more ownership in return. The engineer wanted our investment in funds but didn’t want to give up ownership. And none of us could agree on the value of the company. We focused on the value of the current situation, while the engineer focused on the future value of a successful company.
We were at a standstill, and the physical distance between the owners was taking a toll as well. Since this was about 10 years before COVID, none of us were used to doing business virtually and the sense of trust eroded. Things ultimately took a turn for the worse, we discovered our buy-sell agreement was lacking some vital details (like how to buy & sell shares and how to dissolve), and we ended up getting attorneys involved. Lots of anger, frustration and yes even tears.
Ultimately, we ended up dividing up the assets and debts and dissolving the company. I kept the website interface software, and the engineer kept the sensors and routers. You can’t use one without the other, so neither of us could go on separately. Other than those assets, the company had several thousand dollars in credit card debt, which was divided by ownership share, and several hundred pens and tiny tape measures from our trade shows.
It was a really difficult loss for all of us. As a matter of fact, it has taken me ten years to be able to even share this story in writing. What good came of all of this? Well, I learned five important lessons:
- A “free” buy-sell agreement won in a business plan contest is not to be trusted
- Engineers don’t like to let go of their designs
- Not everyone agrees on the value of a business
- Don’t buy into my client’s start-up business ever again
- Little tape measures are cute and handy!
The End Result
Fast forward ten years and I am still consulting with small business owners. I still love what I do, and I still love to hear start-up stories and discuss the challenges that go along with running a small business. But I learned my lesson and will stick with consulting and training for the foreseeable future.
What about you? Do you have an everyday entrepreneur startup failure story you’re ready to share? I’d love to hear it!