The more stores we open, the more money we will lose

We decided to enter the market with a multichannel strategy. We would have traditional retail shops and a website to sell our products. We only had three products when we launched. Each came in three sizes and three scents which was 27 skus. This meant we couldn’t have full retail shops but needed to rent boutique spaces or stores within a store.

We wanted to have a sales assistant in each store and needed 15 stores to cover the bulk of the market in the capital city, which is 45% of the volume of our retail sales. We built a traditional website which accept credit cards and direct payments by mobile.

We aimed for 60% online sales and 40% in store. Our costs, however, were 70% in-store. They were higher due to rent and labor costs. The average transaction value online was higher than in the store because people bought the larger sizes. We figured that people tried it in store and then bought online. The mix of sales by channel was critical.

We projected the profit and cash from the first three months data and it could never make a profit. The stores consistently lost money. We signed three years leases and each store requires our own sales staff. The more stores we open the more we will lose.

Should I wait to make my advisory board until I can attract more accomplished people?

I wanted to appoint an Advisory Board. I thought it would be great to make introductions and provide us with advice. I thought one of my professors would be helpful but I didn’t know who else to ask. I talked with my brother who suggested that I write down the type of advice I needed and then find the right people. I followed his advice and thought I needed at least four people- finance, strategy, retail/wholesale, and government relations.

We are a startup and when I approached well known people in each area, they said they didn’t have enough time but they liked the idea and I could contact them in the future to keep them updated. I took this as code for we aren’t big or exciting enough for now.

I followed up with others who said they would be happy to help but they had limited contacts and access. I realized if I appointed them now, there wouldn’t be room for the people I really wanted in the future. Should I delay appointing an Advisory Board?

We didn't know enough about technology to manage our website development

We built our first website ourselves. It looked really cool and was informative. It couldn’t accept payments but that didn’t matter as we used mobile banking. It wasn’t very stable and would crash every now and then. But it was cheap.

As the business grew, we needed our website to do more. We wanted to know how people navigated the site and we wanted to introduce live chat so we could deal with service issues. We had $5000 to spend and eventually found a company in Russia that would do the work.

From the start it was obvious to me that we didn’t have the skills to manage the project, even though it was small. They kept asking do you want to do XYZ and we would say yes.

This first invoice came in and it was already $3750 and we weren’t even half way through. We questioned them and they said it was what we asked for and approved. Moreover, they built it into the site and it would cost more to take it out.

The second bill was for $8000 and there was more to come. We ended up spending $15K. Then we had to pay to support the site. This was $450 per month for a limited number of hours of development. We now have a list of over 45 things we need done and aren’t sure how we’re going to pay for all of it.


With inflation and currency devaluation, delays in payment are causing us to lose real money

When we wrote our business plan and figured out our working capital, we thought we would be paid within 30 days of sending out the invoice. To be safe, we used 45 days in our models and made sure to have funds available.

The inflation rate is now over 10% and there has been a 40% devaluation of the currency. This means it is really important to collect cash quickly.

We just signed a new agreement with a mobile platform and it stated they would pay within 30 days. They did on the first three invoices, but then they took 60 days and now are up to 120 days. They are much bigger than us and we need them to survive but with a 120 delay in payments we are running out of cash every month. The banks won’t help. In real terms, we never get our money back. We can’t delay our payments out to 120 days.

We didn't want to sacrifice our principles for growth

Our business was doing $5M in annual sales and we were making $800K pre tax. We were growing at 15% per year and had 25% operating cash flow. We were the market leader in our segment and enjoyed an excellent reputation as an employer. Our CFO went back to his grad school to speak at a conference. When he came home he said we had to grow faster. Growth is the most important thing and we should aim for $30M in sales in the next three years.

None of us agreed with this. It would change the whole company, put the company at risk, and destroy our culture. The CFO wouldn’t give in and had his professor visit us. He was really nice but spent all his time telling us to grow faster. He told us we could grow to over $125M in sales if we followed his plan. He would be happy to become our advisor and had great connections all over the world.

When he left we were all exhausted and confused. We went to a bar to talk. None of us wanted to follow this path. This wasn’t who we are and not why we started the business. We wrote to the professor to tell him; our CFO said he would quit if we sent the letter.

We stuck to our plan and today, sales are $8M, margins remain high, cash flow is positive, and we stuck to our principles.

My staff were hiding the poor customer feedback from me

We started getting customer feedback by putting cards in the product and calling them directly. The feedback wasn’t good. People said the product didn’t live up to their expectations. They said customer service was poor and it often took a week to get a reply. Some said our staff were rude. The phone survey and the cards showed the same pattern.

The team questioned the research method. They said they didn’t get any complaints, that they reviewed every customer letter and monitored response times. I decided to do two things: read all the comment cards and call customers myself. What I read and heard was deeply disturbing. My team wasn’t telling me the truth. They were hiding real problems we had with our customers.

I gathered everyone together and told them what I found. I told them that from now on every problem should be brought to my attention. I also told them every product would have a survey card with my name and telephone number on it so that I would know what was really going on. If we start a company based on hiding data, rejecting market feedback, and ignoring facts, our business is doomed.

The first three years were exciting; now I'm getting bored

For three years we had relentless focus on the core business. We were really good at what we did and resisted any suggestions that we do something new. I got bored and started to look for new business areas for us. Everyday I would come up with something new and race around trying to get everyone excited about it. Each new idea was rebuffed and people told me to get focused and move the business forward so we could get to the point where we could sell it.

I decided to look for potential buyers. I came up with long lists and then talked to everyone about them. Everyone said this was premature and a waste of time and bandwidth.

I can’t get myself refocused on the business. It is boring and I am doing to same thing over and over again.

Our raw materials on hand quadrupled while our sales had only doubled; I had no idea why

The team said we needed a bigger warehouse. The stock of raw materials was growing as we grew and the finished orders were piling up in the loading bay. We had racks from floor to ceiling.

I’m a great believer in analytics, so I started to find the data I needed to see what was going on. When we rented the warehouse, it was supposed to handle three times our existing volumes, so something was wrong. I looked at the relationship between raw materials and sales and this showed that we had increased the raw materials on hand by four times and sales had only doubled. But it was the finished stock that really scared me. We had 12 weeks stock on hand – our bench mark was 45 days. How had this happened?

I knew we were using more cash than we planned and this explained why. Before I lost my temper with the team I realized it was my responsibility for finding these things and asking the right questions. I was distracted by other parts of the business and not paying enough attention to the inventory and stock.

The financial model that got funded isn't one we're committed to

I’ve been working on the financial model for over a month. We’ve been over and over it and I think we have it pretty much right. We included it with the business plan to a range of investors. The first response focused on the gross margin and our pricing strategy. We answered all the questions and modified the model. The second investor was concerned about the growth and working capital requirements. The third investor wanted us to lease our equipment rather than buy it.

All three wanted to invest subject to their concerns. When we factored all their input into the model the results were very different from our original ideas. Their input meant the cash flow was better but margins were depressed and the cash flows remained negative for a longer period. 

We sent the revised model back to the investors. They all had additional questions and suggestions and wanted more modifications. We then went to the investor who we hope would lead the round to see if we could get some consensus and agreement around one model. The investor agreed and we closed the round, but it took three months longer than we had planned for, took up a lot of time, and left us with a plan that we weren’t that committed to, but we did have the money.

As my public profile grew, I had less responsibility running the business

Our business was featured in a major newspaper and then our products won a international award for the best educational platform. We were all proud of our achievements. Speaking invitations started to come in and I thought this would be great for publicity.

The next thing I knew, I was travelling four months a year to speak at conferences and universities. I really enjoyed all the new people I was meeting and I thought I was doing a lot of good for the business. The more I travelled, the easier it was to raise money. We recruited over 40 new people and won two major government contracts. When I was home, I still acted as the CEO, but I had more and more trouble inserting myself back into the business. So much was happening when I was away that it took a lot of time to catch up. There were new people in the company I hadn’t met and new customers I didn’t know.

The COO was now running the company and I was distant from the day to-day operations. At one of the quarterly Board Meetings I was asked to step down as CEO and become Chairman. I don’t know how I feel about this but I wish it had been my choice to make.