Learning from the failures of others

As I wrote yesterday, The New York Times had a recent article on a handful of small businesses that didn’t quite make it over the line and into 2012. Just as each business succeeds in its own way, so do they fail. Which is not to say that there aren’t abundant lessons to learn from the failures of others. It’s just that so many of those lessons never really end up applying. We are, after all, as unique as snowflakes, are we not? As are our businesses.

And let’s face it, the only way to separate the winners from the losers is to look back after they’ve either succeeded or failed. Even the smartest of smarty-pants VC’s fail 90% of the time, don’t they?

As for The Times lineup:

Colorado’s Elizabeth Anne Bed & Breakfast lasted 8 years before getting tripped up in some equity financing to renovate their kitchen. Another case of maybe-we-should-have-stuck-with-the-1980’s-laminate-cabinets-and-formica-counters. But, hey, in 2007 it was still up, up, and away.

The kitchen reno larded an extra $1,700 per month onto their mortgage tab, and, once the recession set in and they had fewer visitors, the owners starting missing payments and got re-po’d.

They recognize that their refinancing decision did them in.

“Back then, we didn’t anticipate things slowing down.”

Bet they wished they’d stayed with their dumpy old kitchen but, of course, back in the day we were all brainwashed into thinking that if we didn’t want glam, we weren’t quite Americans. All well and good if you can afford it, but, wow! These folks went out and revved their mortgage payments up $20K per year on a business that, at its peak, brought in not much more than $100K.

Moral of this story: Don’t make investments that aren’t necessary and/or don’t directly contribute to the growth of your business. The fancy-schmancy kitchen was neither.

Just Moulding, a company in Maryland, also folded after seven years in business. First, I want to say how much I admire a company with a name that says it all. Although personally I would have used the spelling “molding,” I get it: they just do moulding. (Similarly, my favorite tagline ever was on a van I used to see on my 128 commute: We clean blinds. No question about what they did. None of this, ‘we help the enterprise achieve greater productivity and increased sales’ blah-di-blah.)

The fellows who owned JustMoulding thought they “did everything right.” Apparently not.

Here they were, stuck in a recession, selling a product – crown molding – that nobody actually needs. Which is not exactly recession-proof. But this is now, and that was then, when the owners decided that they were going to franchise their swell idea.

And then the recession hit. They were stuck with all the administrative costs associated with running an operation that franchised, but they had few takers.

Moral of this story: It’s a two-fer: If we you really have your heart set on selling something that people don’t need, get into the luxury space. Or balance things out by offering a complementary product or service that people do need. Or figure out how to position your product as a need. (“Houses with crown molding sell at a premium, and faster, than houses without it.”) The second moral is don’t get greedy. Selling franchises probably looked like free money. Not!

The third company was a Brooklyn-based commercial mortgage company “that specialized in finding loans for small businesses.” It only lasted a couple of years.

I’m sure it looked like a good idea to help small businesses navigate the tightened up credit markets, but, alas, P&H Capital was no better at prying open the purse strings than were small businesses going directly. And then there was the “dream deal” that got away: a $500 million factory in Asia. Mssrs. P&H would have gleaned $5M on the deal, had it gone through. Which it didn’t.

Moral of this story: Nothing’s easy, and never, ever, ever count on the one big deal that’s going to save you. 

But, not to worry, Mr. Humet and Mr. Porat – the eponymous P&H of P&H Capital got some other hustles going – one that “promotes small businesses online using free giveaways, and “an online marketplace where monetary judgments can be bought, sold and traded.”

Gentlemen, place your bets. (Winner, winner, chicken dinner.)

Elsewhere in Brooklyn, ScooterFood, makers of all-natural dog food, lasted 5 years in real life, but 35 in dog years. Unfortunately, Michelle Lewis’s concept had a fatal flaw:.

Because her food was perishable, she sold it frozen — but did not realize that in 2006 few pet stores had freezer space. In part because frozen food was expensive to ship, ScooterFood was priced higher than other dog foods.

And unfortunately, Ms. Lewis didn’t keep that careful track of costs vs. revenue, either. She sunk in $60K to keep the business afloat before realizing that she was never going to make a go of it. Arf!

Moral of this story: When you come up with your business plan, have someone on the outside who knows your market scrutinize your assumptions and risks. They may have helped recognize that there was a real problem with the frozen food model. And, if you can’t keep your records straight enough for you to recognize that your money is going down the drain, get a bookkeeper. (Which Ms. Lewis is doing for her new business: caramel sauce.)

The final business, SmartyVA, should have bitten the dust on the name alone. The premise of Smarty VA – which buckled after less than two years – was creating a cadre of social media proficient “virtual assistants”.

The six-week training program cost $1,000 and was aimed at stay-at-home mothers and disenfranchised women, like victims of domestic violence. When graduates took jobs through leads on the site, SmartyVA received 10 percent of their earnings.

Well, I guess that social media management beats addressing envelopes, stringing jewelry, or selling Amway. But, unfortunately, the overwhelming majority of the virtual assistants trained never ended up working. Maybe it takes more than a six-week training program to make someone into a social media manager. Maybe those stay-at-home moms and disenfranchised women figured that after they paid their $1K for the course, they shouldn’t have to fork over another 10% of what they earned.

SmartyVA was the brainchild of Starr Hall.

“I didn’t anticipate how different the mindset of the women I was training was from my own,” she said.

Moral of this story: Naming a company Smarty Anything will come back to haunt you.