I’m not talking acai, crush, or consumer scams. This post is about how to avoid the most common form of business failure. The moral of the story- “In God we trust… All others pay cash.”
A designer I know is a nice fellow. Great design skills, great intentions. Yet we paid him $6,000 cash up-front and he has yet to return a dime of it, despite promises over the last year. Initially, we paid him a few thousand dollars, against which he did decent work, but was slow in responding. Joel was busy trying to build a big company- hiring lots of people, big office, and big expenses. If you ever read the E-Myth, by Michael Gerber, you know of the girl who was an excellent baker, opened a bakery, and was soon out of business. Great at baking cakes, but absolutely zero business sense.
This fellow was the same way. As a one person firm, he could easily keep track of his projects and he only had to worry about himself. But with no project management in place or any kind of structure, he soon found himself pursued by a number of angry clients- all wondering what when project deadlines came and went. He tried to hold them off by making assurances and then personally working harder on the weekends to catch up. But he was trying to do the work of a full team- and soon went out of business in the fall of 2008. He brought in new business partners and tried again- with the same results.
We worked with Joel on a payment plan, in the hopes that our investment in Pixel Envy wouldn’t be a total loss. I believe he paid us back about $200 of the $6,000 over the last 8 months. Since then, he has disappeared, ignoring our messages, in the hopes that this is one of many problems that would magically go away. Instead, that got him in more trouble, as it damages his personal credit, puts him in the hands of a collection agency, and tarnishes his reputation. He signed contracts that commit Pixel Envy to design projects with BlitzLocal and there is a paper trail where he acknowledges the debt.
What can you learn from his situation?
Just because you do what you love doesn’t guarantee success. If you want to grow beyond yourself- and form a team- then you need to know how to run a business. That skill has nothing to do with how well you know PhotoShop, Google Adwords, or PHP. It has everything to do with being able to organize projects for bulletproof delivery- making sure you have the right people in place and a system that has built in checks to prevent failure from happening. It means breaking down projects into concrete tasks that are assigned to people with due dates. We use basecamp for project management, but there are a dozen other tools that will track tasks and “whine” when someone is behind on something.
Last week, I had the pleasure of meeting Rob Hayes of First Round Capital at the TechStars office. They invest in seed stage startups. He said that the CEO has just 2 responsibilities- hiring the right people and making sure the company doesn’t run out of money. Two weeks ago, we had dinner with Dwayne Nesmith, who founded Viant- a web agency back in the boom days that grew to $100 million in sales. He laid out 3 types of companies that work in the agency space:
- Consulting companies that follow a cookie-cutter process. They do it the exact same way every time- a more sophisticated and expensive form of McDonalds. Should one person get run over by a bus, the project should be able to recover by putting another person of that function in. Easy to scale- look at Accenture or PWC or Iprospect.
- The high end consultant- The McKinsey model. You have a team of ultra high IQ folks who can be green berets. Not easy to scale, since there aren’t enough of these sorts of people out there.
- Finally, the franchise model, where each region operates independently of one another, but share in the name. Look at the Virgin group of companies started by Richard Branson. He doesn’t run any of these companies. Rather, he licenses his Virgin name out to a company and gets a cut of whatever they make. It’s a win for everyone, since Branson is a master salesperson, not a detailed company operator.
So look at the example of this designer who loved design, but failed at business. He jumped into business with a great attitude and great individual design skills- yet ended up broke with a bunch of unhappy clients chasing him. He didn’t decide up front which of these 3 models he’d choose to scale on. The choice for you might not be to hire other people. I know a lot of folks who make a lot of money by themselves without having to deal with the hassle of managing other people, projects, and partners. Just look at Markus Frind, who built Plentyoffish.com into a top 100 web property single-handedly.
If you decide to hire others, make sure you budget enough money knowing that about half of the contractors you hire probably won’t work out- it’s just human nature. We have lost a few hundred thousand dollars over the last 2 years from these types of incidents- most all of them good, well-meaning people.
Best ways to increase your success rate? Ask your friends who they use. Have a friend who is already skilled in what you are looking for interview candidates- if you want heart surgery, ask another heart surgeon, not a patient. Find folks who already have something going on and who would have to take a risk to join you (have skin in the game)
Best ways to increase your chance of failing? Hire kids who are in high school or college still- they don’t have professional level experience and will often flake on you. School competes for their time, too. Look at folks who have been at a big company for a long time- odds are that their edge died years ago. Hire folks who you can’t physically meet- offshoring can work, but this post is not about what could work, but where you are least likely to fail.
In case you are wondering, all the examples given are real mistakes I have made. I hope you can benefit from our losses.
Update: We have heard back from this designer and a year plus later, he’s agreed to start repaying back the money we advanced him. This is an encouraging sign of how people can perhaps change for good.