Month: February 2011

Lessons I Learned from a Failed Business Startup

As insignificant as Ukoonto might have been in the great scheme of things, there are many lessons that I learned from shutting it down.

Admitting that plans were not working out is hard, especially since starting a company always involves dreams and grand visions. So to give the venture some justification, I at least wanted to walk away with some lessons for the future.

Know your domain/market

When I started Ukoonto, a woodworking business that made wooden toys sold in stores across Canada, I had no idea about the toy business. I learned fast by observing what was going on around me. Some things really astounded me and some things I did were just common sense, but in general I was very ill prepared to some of the “unwritten” rules in the industry. Had I worked in this industry before or at least had guidance from someone that does, I might have been better prepared and been more agile to implement the necessary changes faster.

Domain knowledge also helps to know where your business is radically different from any other business’ in your field. I didn’t actually know that I was innovative in certain aspects of the business by just finding solutions to my problems on my own. I often heard from “old dogs” in the business what I could or could not do. It is very obviously intimidating when someone that has experience in the business tells you how things are to be done. I fell into some of the traps of “this is just how it needs to be done”, but I avoided others and never knew that they were set for me.

Here is a concrete example. I kept being asked about distribution and that I would obviously need distribution to make enough sales to survive. Distribution can become a complex net of logistics and you will loose a certain percentage of your profit during each step of its complexity. I never went down this road, because I always felt that I could just as easily throw my product in a box and use any of the shipping companies out there. Keeping my own simple distribution in house, I was able to save at least 20%. As it turns out, this is “revolutionary” in this business though. The old model is still that a manufacturer sells to a distributor, who sell to brick and mortar store, who then sells to the customer. As soon as you go down the rat hole of distribution, you will have a completely different set of issues to keep your company afloat. At the end of the day, you might funnel a lot more money through your company, but still keep the amount of profit as if you kept it simple stupid. In this era, you can go straight to the end customer and in my opinion it should definitely be done, at least in the early stages of your business, until you get the hang of how the big boys are doing it.

Keep very close track of your finances

I had to learn how to do my own book keeping, because I was not able to afford a professional to do the work for me. I obviously did all the mistakes under the sun, I was using the wrong accounting system, didn’t keep properly track of money in the beginning, didn’t understand crucial ratios of investments vs. income, and so on. My first advice is: talk to a good accountant and pay him for it! Set up a system that you can run, and that he can review when it comes to tax season. Doing your own book keeping also teaches you how to read your companies most important financial reports, which every company owner or CEO knows how to do.

The following are some concrete examples of what I mean by learning how to read your numbers.

There are certain standards in every business. One of them in retail sales is that you should be able to accept credit cards. “Really, how bad can those 3% fees to the financial institutions be?” Well, monthly fees and even low percentages of every sale, really ad up to large amounts at the end of the day. You will have to figure out if you loose more money by not selling to certain customers that want to use credit cards, or by just paying the fees.

It is very common in the toy business to present your products at trade shows, at which stores can discover your items. Show owners will promise you great returns on your investments. My investments in this field never paid off. I didn’t realize at first that show owners never cared about growing my business, which is what they would always say. They are just in the business of selling you space on their show floor, nothing else. They will pull out all the stops they can, to get you to fork over $2000 for your booth. This seems to be part of an old industry structure (BTW: even the biggest boys out there, like Mattel, have already pulled out of this system, they know how irrelevant this was to the success of their business). You are much better off to produce a similar experience online that store owners from all over the country can visit. $2000 will go much further this way. Obviously, there is no substitute for meeting someone in person, but you can use your creativity of how you can create the personal touch.

I always thought that shipping my product off to stores and then running after the money (sometimes for months on end) was twisted. When you go shopping, you pay and then you get the item. In wholesale, for some reason this model was turned upside down, you ship them your product and then get the money much later. This process can cost you a lot of money and time. If at all you can find a way to get paid before sending out your product, you will much better of. The best scenario would be “sell before you buy” which is not always possible, but you should keep that in mind.

Keeping your competition in mind is good, but don’t let them freak you out. You know best what is going on in your own company, and even though things might look great about your competitors and they might seem to be crushing you, you never know if they are just weeks away from shutting down. So look at your business and your customers and concentrate on making them happy and grow your business solidly. It is the only place that you have under control. You certainly don’t want to be spinning out of control because of what your competition does.

Business is about profit. Be it triple bottom line (people, planet, profit) or not, you need to make a profit after ALL your expenses, which include paying yourself. Paying yourself is an iffy topic for a small startup. You are “supposed to” put your blood sweat and tears into your company and hope everything goes well. “This is just the risk you take as an entrepreneur.” they say. After working years on your company and  still not paying yourself adequately, you might have to reconsider just calling it a hobby. The business is supposed to be there to support you and not the other way around.

Things take time

There are no “make lots of money quick” schemes out there (not to mention “get rich quick”). I was running things as if I would be able to make a lot of money in no time. It takes a lot of time, until people catch up about your company with a great product. You have probably busted your back for years on end before reaching critical mass. The new generation of so called “entrepreneurs” today would rather relax their way into productivity, but that’s not how it works.

Jason Calacanis said on this podcast “Whether you dream small or big, you will be spending the same time on no matter what business you choose to start, so go big.” (I paraphrased, but you can call him on it). You will always be busting your back 120% of your time, so dream big and get started.

In my opinion, creating a company that leaves a legacy is the way to create real value. Founding companies just to flip them within a few years and hope to make a fast return, will set your eyes on the wrong goal. You can go for it (and many have done it), but I can only assume that it might leave you hanging empty at the end of the day.

Don’t overprice your (green and eco-friendly) products

Fortune Magazine (November 2009) had a great article about green products, and whether people are ready to pay more for them. As it turns out, the general population is okay with paying about 10% more for (so called) green products. Understand that it is crucial to find out as much as you can about your market and its pricing. It’s a very complicated topic and it has made or broken many great companies and CEO’s. I won’t be able to offer any real advice on this; all I can say, people do watch the dollar. They want value for what they pay, and that is the bottom line. The general population is in it for themselves and not for others (even buying green products generally makes them feel better about themselves, they might not actually care about the environment). Keep in mind, what people say they will pay for a product is not necessarily what they will actually do. Only actual sales will tell you the truth.

A lot of “activists” (lets just call them that, you could also call them “mommy bloggers”), demand much faster and often unrealistic changes. Fact of the matter is that our economy is run by big monetary machines and fast changes are very unlikely. If you go into business, you are now part of the system. Don’t think that you are in some kind of bubble and the economy does not affect you. The fastest changes, whether for the good or for the worse, still happen when investors and share holders can walk away with more money in their pockets.

Good artists copy, great artists steal. (Picasso)

Be smart. Be alert of what other business’ do, especially in other domains that you are not involved in, and try to use that knowledge. Don’t just blatantly copy someone’s business model, chances are you won’t be able to make it work anyways. Steal little ideas and make them yours. Creatively implement certain aspects of other business’ into yours. You will most likely walk away a winner.

Just get started

In the summer of 2007, I went camping with family. One day we ventured out to go swimming. There were really high (for my taste at least) cliffs to jump off of. Naturally we wanted to get up there and jump, but once you get up there and look down, you’ll probably change your mind very fast. Most likely, you will start discussing, why you should or should not jump. Some will say to do it, some will tell you not to jump. It takes some courage to actually jump and the longer you wait, the more courage you will need. I learned two things from that experience: 1.) Just do it! Once I landed in the water, I forgot what all the fuss was all about in the first place. 2.) Don’t always listen to what everyone tells you. Make up your own mind and then just go for it.

As an aspiring business man, you will never achieve your vision and dreams, if you don’t make the first step and jump! There is no alternative to actually starting a business and learning how it is to run it (and screw up). If you are planning to start something, but are never getting out of the planning stages, make your first step. No one actually cares if you scew up, so just get it going. Statistically, you will screw up your first few ventures, so the faster you get that over with, the better. You will never be able to plan for everything that will happen, so use your brain and make the first step!

Learn more about starting your own company from these great sources:
Steve Blank
(Entrepreneurship: Nature vs. Nurture)
Jason Calacanis (sign up for the “Jason Nation Newsletter”)
E-myth blog

Great books to read:
The Dip
Get Smarter
The E-Myth

I have not read this book myself, but I’m pretty sure this might be very helpful (hint hint, I’d love this as a gift 🙂 )


Shut it down

In case you notice this little blip at the end, when you see that there is no way out of your situation and that you are in a dead end business, bring up the courage to shut it down. This is a very hard step and a long process, (it took me months just to properly shut down a very small business) but stand up like a man (sorry ladies, I think you don’t need this advice, you are much smarter than us men) and call it for what it is and shut it down. You know exactly when throwing more money at the problem will not fix it. One tip from the book “The Dip”: “Quit before you Start. An assignment: Write it down. Write down under what circumstances you’re willing to quit. And when. And then stick with it.” Quitting doesn’t make you a looser. Winners quit all the time. “They just quit the right stuff at the right time.”