What to Do With a Major Windfall
John Daly's Florida software business got a boost from a law spurred by the 9/11 attacks. New York entrepreneurs Benjamin and Autumn Lido received a surprise call that resulted in a big order from a customer they'd never considered. After many frustrating struggles with patent infringement litigation, snowboard-binding inventor Jeff Sand was able to lock up leading market share by blocking a competitor from bringing product into the country. All these entrepreneurs benefited from major windfall events that were unexpected, unpredictable or both. In the wake of the windfalls, they found that a stroke of luck can do a lot to help a company. An unexpected gain can help expand production, pay off debts, fund new marketing and generate excitement among employees.
But a godsend isn't necessarily a gimme. If not handled correctly, a bonanza can even turn out to be a bust. If an entrepreneur is blinded by what looks like a golden opportunity, overoptimism can lead to overexpansion or overcommitment. For not a few entrepreneurs, this would-be blessing has turned into a curse. So if you want to make the most of an unexpected gain, you have to manage it carefully.
The Ways of Windfalls
Windfalls can come from all sorts of sources, some more unexpected than others. Government regulation, for instance, is commonly seen as an obstacle by many entrepreneurs. For some, though, it provides opportunity. After 9/11, Congress enacted the USA Patriot Act, which required banks to install systems to detect money-laundering. For John Daly, 46, whose small Miami company, Americas Software, sold software designed to detect money-laundering transactions, the law brought a windfall.
Clearly, windfalls can help you. They can also hurt you if not handled correctly. One risk of receiving a stroke of luck is that you'll be fooled into thinking that's the way things are going to be from now on.
Increased demand for software to detect money-laundering doubled Daly's sales revenue the year after 9/11. Business had already been good, says Daly. But existing regulations weren't well-enforced, and bankers' awareness of money-laundering rules was low. Since 9/11, he's gone from nine employees to 30, with no end in sight. "Instead of going from 0 to 60 in three seconds, it's [like] going from 0 to 60 in one second," he says.
Insurance and lawsuit settlements represent other potential sources of windfalls. San Francisco product designer Jeff Sand spent most of his time in the early 1990s fending off a number of patent infringement lawsuits filed against his company. "Most of them were nonsensical," relates the 42-year-old co-founder of Jeff Sand Product Development. "As it turned out, nobody really had any claim against us. But to get judgments cost a lot of money." Battling them required retaining a sizable platoon of attorneys, which consumed cash that could have been better spent developing new snowboard-binding designs. But as it turns out, those attorneys came in unexpectedly handy for restraining a competitor who had flagrantly infringed on one of Sand's patented designs.
"A competitor had copied our product, and we went to the trade show and delivered a cease-and-desist order," Sand says. "Then we went in and found all their customers and told them they weren't going to ship and that [the customers] should buy our product instead." After diverting a sizable percentage of customers to their own designs, Sand saw a chance to get even more aggressive. "When they tried to ship stuff from overseas, we had it intercepted at the dock and impounded," he says. With one blow, they locked a major rival completely out of the U.S. market. The result propelled Sand's company into the leading market share.
But probably the most common windfall for an entrepreneur is an unforeseen, outsized order from a customer that wasn't even on the radar screen. It happened to Benjamin Lido, co-owner of Convenience Kits International Ltd., a 18-year-old Lynbrook, New York, company that sells travel-sized products, such as toothpaste and shampoo, packaged with combs, razors and the like. For the most part, their products are sold through drugstore and grocery chains, but they do have other customers. One was a small regional airline, for which they put together a diaper kit for parents traveling with babies and toddlers.
"It was a small order, but successful," says Lido, 38. Then, a senior manager working for another, much larger airline saw the kit while she was traveling. She asked about preparing a kit that could be given to business-class travelers who were stranded or who had to deplane without their luggage. Very quickly, that thousand-piece order for small diaper kits led to a larger order for a much bigger and more expensive travel kit.
"We weren't even selling [to] airlines, and all of a sudden we were selling a couple hundred thousand units to an airline," Lido recalls. The windfall continued, as travelers who got the airline's kits began calling to equip traveling sales forces and order incentive premiums for customers. "It just snowballed into something very big for us, and it was unsolicited," Lido says.
An even larger windfall can result if the surge of orders comes from a large group of new customers. Many entrepreneurs who experience sudden and unplanned godsends give credit to unexpected exposure in a large, influential media outlet. For others, it could be a positive rating from an influential organization, such as Consumer Reports magazine. An unpaid endorsement by a well-known celebrity can also work wonders. Even a household name like Nike received a boost when U.S. women's soccer star Brandi Chastain spontaneously shed her jersey on TV, revealing a Nike sports bra, following the team's 1999 World Cup victory.
|The Devil's in the Details|
1. Plan ahead. If you see a significant chance your company may come into a particular windfall, have a plan for making the most of it. For instance, you could arrange with colleagues or competitors to handle your overflow if a huge order comes in with little warning.
2. Read the fine print. The prospect of a windfall may blind you to normal caution. Just because a contract, order, settlement offer or other windfall has big numbers doesn't mean it's free of big catches. In windfall situations, use the same discretion you would in any deal.
3. Seek advice. Few companies are prepared for outsized sales surges or massive cash inflows. If it happens to you, find other entrepreneurs or professional advisors who have been involved in similar situations, and ask them for options on handling the surge or investing the cash.
4. Look for long-term leverage. A windfall can give you more than a one-time injection of cash. You may be able to leverage an entry to a new market, lock up more of an existing one, or fund investments in new marketing or product development that will pay long-term dividends.
Clearly, windfalls can help you. They can also hurt you if not handled correctly. One risk of receiving a stroke of luck is that you'll be fooled into thinking that's the way things are going to be from now on. It's all too easy to respond to a one-time cash infusion or short-term sales surge by increasing costs long-term, warns Bruce Kemelgor, associate professor of management entrepreneurship at the University of Louisville in Louisville, Kentucky.
Common mistakes of windfall recipients include expanding by purchasing new machinery, expanding into new space and hiring new employees to a degree that isn't justified by the long-term prospects. "Sometimes it paints an unrealistically optimistic picture of the future," Kemelgor says of a windfall event. "When reality strikes, it strikes hard, and then they're not further ahead-they're behind."
The essence of a windfall is that you are not prepared for it. But what if you get that big order and can't handle it? Sometimes production requirements are so far beyond your existing capacity that you would have to expand more than is wise. In those cases, you may be better off turning down the windfall. "If you are not in a position to exploit the opportunity, it becomes very risky if you still seek to take advantage of it," says Kemelgor.
Even if you are able to handle a sales windfall, your systems may become so stressed that your company's performance will fall to a dangerous level. If your longtime customers receive inadequate service or quality while you pull out the stops to handle a one-time event, you may wind up damaging relationships that will cost you far more in the long term. "People need to appreciate whether something is a true opportunity or [really] a veiled threat," says Kemelgor.
|Make Your Own Luck|
|Don't wait for lightening to strike-create your own windfall. Read our Innovation Toolkitfor innovation secrets from 18 innovation experts.|
Sometimes the hardest threats to detect are contained in the terms of an agreement. A cash-rich lawsuit settlement, or a contract from a new customer offering high volume, may look good on the surface-while the devil resides in the details. Settlement terms may include restrictions, such as agreements to eschew publicizing a settlement, which make it difficult for entrepreneurs to leverage legal success into business success. Similarly, orders that offer large unit volumes may also demand unit prices so low that profits virtually disappear.
"Sometimes your eyes get big, and you think it's the chance of a lifetime, and you don't see the risk," Kemelgor says. Big buyers may be more interested in getting one order filled at a low price than developing an extended relationship with a supplier. If it turns out that you can't fill their order without risking bankruptcy, Kemelgor says, "They're not going to help you. They're just going to walk away."
If the terms are good and the volume isn't too high, one key remains: Is this a business you can succeed at? Entrepreneurs may be tempted to tackle a new customer who waves a big order, even when the product or service is one that, while similar to what they're already doing, is different enough to make success uncertain. Convenience Kits International found that its airline order, in addition to being very large, required it to assemble more items from more sources than the company was used to. "It was a different type [of] order altogether," says 40-year-old co-owner Autumn Lido, Benjamin's sister. The kit came in a larger bag than they normally used, and the airline wanted its logo imprinted on the container. That meant they couldn't sell the kits to anyone else if the deal fell through. The size, sourcing and customization issues meant this deal was, while promising, fraught with peril. But the Lidos decided what they had to have and wrote their own terms. "We told them we had to get money upfront to make the product work for us," says Autumn. The airline agreed, and as a result, the deal worked.
From a single windfall, the Lidos look for benefits to keep on flowing. Benjamin is eyeing nonretail markets for their products, including premiums, corporate logo items and custom kits with items tailored to certain industries. "Alternative markets could very well be larger than the retail people," he says, pointing out that windfall surprises can come at any time. "We have big business in the premium industry, where we had nothing before."
|A Run of Good Luck|
Windfalls have pushed countless entrepreneurs into prominence. A World War II contract for down-filled sleeping bags took Eddie Bauer from being a low-profile sporting goods manufacturer in Seattle to being a household name. Bill Gates would likely still be a small-time software developer if IBM hadn't unexpectedly chosen MS-DOS as the operating software for its new PC. Silly Putty would probably still be an unutilized chemical oddity if a columnist for The New Yorker hadn't raved about the obscure toy in an unsolicited plug, causing hundreds of thousands of orders to pour into the mailbox of its nearly penniless promoter.