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In Failure, 6 Valuable Lessons

Over the course of one year, Craig Reiss went from thinking about a $1 billion valuation to closing his doors for good. He offers his story to save others the emotional devastation.
March 5, 2009
URL: http://www.entrepreneur.com/article/200466

In the fall of 2007 we were in Vegas, baby, working a huge convention with nothing more than a big idea and a lot of nerve. We were hot, and we were flaunting it--so much so that our biggest competitor whined and moaned and had us banned from the convention floor. I guess it upset them when customers started posting our logo on the sides of their booth and the windshields of their cars. We left with hundreds of prospects and bad boy celebrity status. It couldn't have gone better.

Everyone around us was high on the fumes of our buzz. We had extraordinary talent and our product was immediately perceived as best in class. Through a flashy presence and sheer force of will, of which I had great reserves, we convinced the market we were the next big thing.

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Our customers were so engaged with our ingenuity that 20-minute sales calls turned into two-hour brainstorms At our launch party in Hollywood, our customers came in Lamborghinis and our investors arrived in Bentleys. Even the go-go dancers arrived in BMWs. I had it going on.

Then the first economic tremors hit in early 2008, when gas topped $4 a gallon and Wall Street wrote off its first round of toxic billions from the bursting of the mortgage bubble. But we seemed to be all right.

The mood in our market remained well short of panic, although our customers delayed spending and started focusing on 2009. We fell behind projections, which was understandable for a startup in its first year of operating. The picture right around the corner looked pretty damn rosy: By fall we were able to forecast substantial sales for 2009. We were set to have a profitable, scalable business if we could bridge operating capital--which we did--until the revenue started flowing.

We attracted a new group of individual investors from around the world, each with a stratospheric net worth. We went through intensive due diligence and structured a deal. Then the global financial markets quaked and collapsed, again and again, day after day, and the investors vanished in an instant. One minute we were a sure thing. The next, we were under-funded, over-committed and unable to hold on. We shuttered the business, road kill in the economic tsunami.

In the months that followed, I hunkered down into economic survival mode and shook off the emotional devastation of failure a layer at a time. I edited the summation of my entrepreneurial adventure, deleting any sense of victimization. Now my story reads like this:

I ran a business. Now it's gone. I failed as a manager. I bet the ranch. Now it's gone. I failed as an investor. The End.

Anyone can fail--once. Fail twice and you transcend into a failure. What I've learned is that, in the face of failure, the only thing that matters is to live to fight another day. The tough-love survival tactics are best extracted from the lessons of failure. Here are mine.

1. Survival Matters Most.
In order to survive, we must dedicate the totality of ourselves to it. This is very difficult to do. Concentrating on survival instead of focusing on success runs counter to the motivations and self-confidence that led us to be entrepreneurs in the first place. Yet it takes selfless dedication to strip away accommodations we've made to the realities we face.

Making a stone-cold assessment of the situation, no matter how unbearable the conclusion, is essential to survival. There can be no tolerance for denial, no sustenance in victimization, no excusals required. We must be able to strip the truth as we have rendered it from the reality that confronts us. To let reality in, we must get out of its way. And survival is very much about what is real.

The means to survive are always before us. We must make ourselves able to see them by embracing the inverse of what we are doing. We must be willing to change completely, even if the business that survives no longer resembles the business we started. We need to abandon what we hope or believe could happen--especially anything that would absolve us from the need to consider mere survival. Nothing else matters.

We are managers of our companies. And managers manage risk. In the end, we are judged on nothing else. Good times can obscure the cost of delusion. Bad times, like these, expose it for the lethal vulnerability it is. Had I not failed at this, I would have a business of some kind today. It's that basic.

2. The Toxic "If . . . Then"
Here's an easy test to determine if you should be taking survival strategy very seriously: Have you made any of these statements in the past 30 days? "If we can just get around this corner, then things will pick up." "If this one deal comes through, then others will follow and we'll be all right." "If we can hang on until we feel the impact of the economic stimulus bill, then things will work out." "If we just pour some more money in to get us through the tough times, then we'll end up being successful."

If you're overly confident or helplessly hopeful, you can substitute the word "when" for the word "if" in any of those or similar statements, but you're still in jeopardy of being unable to respond to what you have to do to survive.

I used every one of those "if" propositions (except the one about the stimulus package), and in my analysis every "then" had some miraculously positive outcome. Nothing contributed to my failure more than my unrelenting dedication to my original concept of success. It almost worked, but it didn't.

3. Money Has a Strong Survival Instinct.
It is difficult to remember--or even imagine--that just a year ago there were great sums of money looking hard to find someplace to park--anywhere that would return more than the stock market's 10 percent to 20 percent a year. In times like that, money is downright cordial.

But when money's paper value drops 20 percent in a day, and by half or more in a few weeks, with no foreseeable chance of recovery, money switches into survival mode. It changes its phone number and e-mail address. It becomes impossible to find.

If you think you can find investment money, you're trying to buck insurmountable odds. If you think the new administration will trickle stimulus money down far enough that you can grab some, you're delusional. There is no bailout coming our way.

The beautiful thing about capitalism is that it accepts any and all adventurers. The down side is that capitalism is a harsh and unforgiving matron. When judgment is rendered, you either made it or you didn't. It's up to you--and you alone.

4. Act on the Worst Case While You Still Could Be Wrong.
If everything goes completely wrong, can you survive? If everything gets even worse than you can imagine, can you survive? Have you calculated what seemingly desperate maneuvers you would have to take to survive, and precisely when those changes should kick in? Are your survival weapons locked and loaded? Have you eliminated anything that could muffle the blare of the alarms?

The key to survival is staying ahead of the need for it. No matter what state your business is in right now, its cost structure has to be amended. Renegotiate everything. Leases and loans have to be brought to a sustainable level, or the business must be restructured without physical location or need of capital. Obligations must be sublet or abandoned. Cut sales commissions. Eliminate every job you can, and then eliminate almost every job you think you can't live without.

We all tend to put off making drastic changes because we consider consequences. Cut commissions or salaries and we could lose our best people. Give up our location and we would look bad and no one will want to do business with us. Or we might think that we'll never be able to get another location as good once things turn around. Or so we tell ourselves--and we're wrong. Talent is a cost, not a dependency, and it must be measured against return. A location grander than its return is vanity.

Perhaps the biggest mistake we make is to become paralyzed by our sunk costs. We've all put a lot into our businesses. We can't just walk away from those investments, certainly not without fundamentally weakening the business as we know it and, more emotionally, because it would make us look like we've been damn fools. But that's exactly what we need to do. Money spent is money gone. We need to dedicate ourselves to the money that's left. We have to measure every move against its contribution to survival.

5. Manage Expectations--Your Own and Your Investors'.
When I had my first board of directors meeting, one of my major investors opened the proceedings by telling me he couldn't remember what this business was about, and that he'd only invested because his friend told him to do it. Would I please, he asked, start at the beginning? There I was, pitching money I already had, but I sucked it up and delivered. When my time was up, the board member told me two things: First, it was clear I knew my stuff; and second, he'd made some quick calculations and he now figured this business could be sold in few years for $1 billion. He was making eye contact now.

His only follow-up question was whether I expected to hold the business until it reached a $1 billion valuation, or would we flip it before then and at what threshold? I remember pulling a number out of the air: "If we were offered $200 million," I said, trying to sound more earnest than smug, "we would have to have a serious conversation."

I confess: that evening I read a magazine about boats (yachts, actually) and DuPont's Registry of Fine Homes. The first time someone says the words "billion," "dollars" and "you," it's heady stuff. But allowing that expectation to be set was a curse from which there was no recovery.

The giddiness of our expectations made considering radical changes to the business (retrenchments, cost reductions, time delays, even suspending operations in order to withstand any eventuality) a severe disappointment to the investors--and to me, because I was both the largest investor and the architect of the operating strategy. But we pressed on. Besides, if we flipped it, whatever problems the business might be having would no longer be our concern.

A year later, I shut off the lights. No one remembered having been intoxicated. Instead, they asked sober and sobering questions.

6. Be Willing to Fire Yourself.
We are all vested in belief in ourselves. Without that, we wouldn't be entrepreneurs. We start businesses because we believe we have talents, will, presence and competencies that are instrumental to the success of the enterprise. With all of our being, we believe that our personal talents are core to our competitive edge. Nothing corrupts judgment more than the filter of self-appraisal.

The problem is that the entrepreneur is vested twice: as an investor with cash on the line, but also as the manager of the business. As an investor, money is equity and judgment is concise. The money is in to make money, period. It gets no satisfaction from how that is done. Business is best when it is simplest. Emotions are complicated.

For the manager, sweat is equity and judgment is personal. The manager side of the entrepreneur makes the business a business. The business is life, and life has its complications.

In order to survive, you must ask your managerial side to leave the room while you speak with your investor side. Only as an investor can you coldly ask whether you are truly the best person to be running your business. Is there someone else who could help it survive, let alone prosper? Would you be more valuable as an investor guiding a manager and providing your special talents where they would create the most return?

This was really the only piece of my own advice I tried to take while my business was still running. Part of the agreement with my new investors was to assign management control of the company to the lead investor in the group. I had known him a long time and believed that he had the business skills to lead us through our predicaments, stabilize and solidify the company, and grow us up.

And that's the only reason I'm sure that, had the economic meltdown come even a few months later, my business would have been funded and this story would have been about the heroic entrepreneur who pulled off the next big thing. It might have worked out that way if I had fired myself sooner. A most important lesson learned just slightly too late.

Craig Reiss has been a senior level media executive and the principal creative for more than 300 magazines and websites in 37 categories from automotive to action sports and from entertainment to agribusiness. He has mentored many leading editors, journalists and designers who have won hundreds of magazine awards, including dozens of National Magazine Awards. Most recently, he became an entrepreneur, becoming an internet publisher of video-driven enthusiast websites that converted magazine advertisers into interactive video marketers

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