Some decent points in there. But also the most misunderstood and misrepresented business statistic of all time:
> Some 70 percent of businesses fail within seven years, according to the Small Business Administration.
Wrong. Very wrong. 70% of businesses are not going concerns within seven years. Doesn't mean they "failed". They might have been acquired, or closed, or a different project might have taken the entrepreneur's focus. If a guy starts two companies as small side projects, and one takes off, he closes the other. That'd be reported as a "50% failure rate" for people who can't get their head around the statistics. But they didn't fail - they served the entrepreneur during that part of his life, he learned lessons, hopefully made some money, and then moved on to bigger and better things. Starting a business is hard, but it's not this impossibly bleak predicament that people make it out to be.
What percentage of jobs "fail within seven years"? I wouldn't be surprised if it's a comparable percentage. Yet, somehow, no one ever says "Are you SURE you want to be looking for a job? X% of jobs are terminated within seven years, you know".
This shows two important rules of running your own business very clearly: You need to understand every aspect of what's going on in your company. And don't hire friends and relatives.
Had the subject of this story kept at least some basic track of his financial position, I am sure he would have been able to flag the problem much earlier and probably avoid the disaster. Something basic like how much money comes in, goes out, what's owed to you and by you.
Well I hope that is obvious for any type of professional investment.
Although my account tells me you are never fully protected from personal liability by setting up a corporation. The court system always has some leeway.
Borrowing money for manufacturing/construction-type businesses is fairly common. It's not unusual to have open orders that exceed your on-hand capital. It's also not unusual for such businesses to have seasonal cycles. If you only worked on what you had cash for you'd be at a competitive disadvantage to those who borrow.
After all, spending money you haven't received yet is the basis of accrual accounting.
Of course, I wouldn't borrow money on a web startup project. That's a whole nother can of worms. But that's not what his business was.
Sounds like he got behind the power curve when he lost the discipline to run an accrual business. It takes a lot more attention to detail, which he didn't have, unfortunately.
Some types of capital-intensive business models essentially require debt funding unless the founders are independently wealthy and/or are willing to trade equity for VC funding.
A classic example is starting/owning a restaurant or bakery.
Not necessarily true. I've helped several friends with less than US$1000 in startup funds open restaurants/bakeries...within 2 years of when they started out to do so.
Ego, lack of creativity, and laziness are among the only impediments to starting most businesses. You just have to want the end result bad enough that you are willing to work hard on a smaller scale until you can fund your dream. (You can work as a caterer, personal chef, food delivery service, and/or sell your food on consignment at other locations to raise the funds for your own place. MANY restaurants will let you borrow their kitchens for 'free' in exchange for cleaning up or for doing prep work or cooking specialty items. Some may want you to cover the increased insurance risk, but you can still get started in a licensed facility for a small cash outlay. Most independent restauranteurs understand what it is like to start a new food-related business, and many are likely to help you out unless you're an ass or a direct competitor. Then, you can just build up a base of customers and cash until you can buy or lease your own place. If you have good products, and are smart with your cash, it doesn't actually take too long to get enough of a bankroll to go out on your own. It took one of my friends only 11 months as a 'virtual cupcake consignment company' to MAKE the funds she needed to open her own bakery, and she even bought her real estate outright.)
Side note: One of the ladies I assisted in starting her own bakery ended up closing it and going back to bakery consignment and catering because it was less stressful and more lucrative for her than retail. Some of these "ramp up" businesses may be better in the long run than actually owning your own retail/restaurant space.
Borrowing money is usually the best option. That's the whole reason for having limited liability as it frees up entrepreneurs to take high risks for large rewards. Part of any entrepreneurs job is to assess risk and reward.
That sort of company would raise money by selling stock, not through debt. Until it was big enough that it could secure debt with something other than the founders' houses, anyway.
What I meant to say was that a capital-intensive startup would need venture capital to take off, but in that case the VCs would own the company. The founders would not exactly go into debt.
You're totally right. Going into debt is something one should definitely avoid.
I liked the book excerpt linked on HN last week and am currently reading Felix Dennis's "How to Get Rich". He places accepting venture capital as substantially worse than debt.
Knowledge and technical knowhow about lazer/semiconductor/biotech fields is not cheap/easy. You are involved either as a researcher, teacher or student working on a phd in those fields.
If that is the case, corporate funding for your research (assuming it is going somewhere) is fairly easy to obtain. Also, if your standing in the field is good, and you can articulate your ideas/goals well, angel funding should also be obtainable without much trouble.
In both cases, you are not borrowing money which you have to pay back someday. It is others who are taking a risk funding your ideas. If the risk is good, they get returns, otherwise its their money down the drain. And unless you commit some sort of fraud (embezzle the money as opposed to using it for real product research), you cannot be sued.
I would amend "Don't hire friends and relatives" to say "don't hire people you can't fire" - I've had good luck with friends and relatives; but I've only hired friends that do jobs that I know how to do (and thus I know how to judge) and I seem to be able to say 'this isn't working out' without loosing a friend.
maybe "Don't hire people you are not willing and able to judge in an objective manner" would be better still.
His average contract was about 100K, he lost control of his cash flow in the worst recession in at least three decades, perhaps six. He must have done a lot of things correctly to run a well respected business for 20 years, I don't understand the strongly negative tone of the article.
His conclusion "He is no longer a business owner, but I suspect he is doing what he should be doing" implies that someone who ran a business for 20 years with 40 employees wasn't cut out for business.
He focuses on the negative because most businesses fail, and as entrepreneurs are eternal optimists, many don't fully consider the downside of starting a business. Right now MANY small businesses and startups are failing. Its important to understand the potential negative consequences of starting a business. Most people, and especially around here, are in denial about this basic fact: by the numbers, your startup or small business will most likely fail. Thats ok. Your job is to do everything you can to beat those odds.
Also, most people don't have the luxury of 'capital light.' When small businesses fail, families usually suffer. That is part of the game, and its worth talking about once in a while, in between articles about guys that hit it big.
Very true. We constantly hear the "I woke up rich the very next day!" type stories, and it skews the perception of what running a business is like.
I have a lot of sympathy for old-school businesses that need a lot of operating capital. Putting your house in danger to support your business is a choice I hope I never have to make. In my case, that would essentially be the same as putting my marriage on the line.
Interesting quote I heard last week, from Stephen Fleming, successful VC and now Vice Provost of Georgia Tech. It was something like, "I've never seen a married founder bootstrap a company to a large exit and had the marriage survive."
I think it depends upon what value of large. One counter-example: Greg Gianforte bootstrapped RightNow technologies to 100M in revenue, still runs the company, and is still married. Two others would be Bill Hewlett and David Packard.
So this was the failure of a long established business. That's certainly a different problem from the "infant mortality" challenges that most startups face.
Think of it as farming, if you sow a lot of seeds some will never come up, some will come up, wither and die and some will come up and grow to great height, then whither and die.
Everything has a lifecycle, businesses do too.
Any business that has generated money over its lifespan and has employed people and paid them is by some measure a successful business.
The timescale at which that cycle plays and the size of the business are not relevant.
Quick summary: Guy starts a successful business but outsources the accounting to his wife's friend's brother. The accountant books unfinished business as money in the bank. Economy sours and the truth comes to light. Guy goes out of business.
So the "dark side of entrepreneurship" is losing your business because you outsource a critical component and don't bother to double check the results?
I often wonder if the high 90% startup failure statistic is a result of negligence and lack of common sense. I hope to put my money where mouth is and find out on my own in the near future. Can anyone on the other side of the fence chime in on this?
Most entrepreneurs with a technical background should take a class or two in managerial accounting before they start. They should work hard at understanding it and developing financial models for their business. And they should pay as close attention to their business as they do their product.
Perusing HN you see how few articles there are about managing the receivables cash flow cycle, negotiating with vendors, forecasting financial performance and cash flow, dealing with the legal aspect, working with banks, documentation, managing salespeople or negotiating sales relationships, etc. But there are many companies with decent products that fail, and many are caused by one of those problems.
A course in accounting isn't necessary. The first few chapters of a "Principles" text and PAYING ATTENTION is all that is needed if you're not doing the actual accounting yourself. EDIT: "Accounting the Easy Way" is a good book for anyone who just wants/needs to understand it rather than doing it.
Chances are you won't make _this_ mistake, but if your company gets off the ground, you'll make a couple of big mistakes that lose you customers, cash and pride.
And you'll look back on those mistakes and wonder to yourself, much like the hero of this story, how could I have let this have happen?
It's embarrassing and humbling, even more so when it's written up in the New York Times.
Yeah - my experience is that most startups (including my own) really do fail because of the founder's stupidity, but it's very hard to avoid that stupidity even if you know this. There're so many balls you have to keep in the air as a founder, you're bound to drop some of them. It's only after you've practiced through a few failures and can instinctively avoid some of the more obvious failure modes that you start having a reasonable chance of success.
If your business ever goes beyond a one-man operation, as this guy's did, you will find it necessary to trust other people -- partners, employees, vendors, lawyers, and, yes, accountants. Whether that trust is well-placed or mis-placed can be a very fine line. You seem to have the same deep understanding of what went wrong as this guy's wife does from her armchair in the living room. After your as-yet-uncreated business survives for 20 years, provides a living for 40 employees, and becomes a leader in its space, feel free to come back here and educate all of us on the meaning of negligence and common sense.
If he failed to look at the books in 20 years, or even once notice the shoddy numbers, that would be very strong evidence of negligence. Delegating an essential job doesn't take away the responsibility for supervising performance to make sure the job was done right.
You assume too much. Who's to say he didn't instruct the accountant to cook the books? That seems the most likely scenario to my cynical mind. What kind of accountant would make that kind of basic error?
It beggars belief that the guy could run a successful business for 20 years, but could not understand the difference between receivables and booked work. He was probably boosting cashflow to keep the banks happy, then one day they figured it out and shut him down. Otherwise he would have surely been able to get loans for that vital "equipment".
Ah well, happens all the time. I feel sorry for the guy but he should have been more careful.
You probably don't have time to comment on Hacker News threads when there are so many moving parts of your industry-leading decades-old business that you need to go attend to. Unless you're not speaking from a position of comparable experience. But I doubt it. Opinions completely divorced from the actual facts of the case or from any relevant experience would never be proffered on Hacker News. You probably know exactly what you're talking about.
We need more articles like this on HN. Pursuing a career in entrepreneurship & startups is a long, hard, and unglamorous road. If you're prepared for that at the beginning it won't make things much easier but it might give you the resolve to not give up.
I've see too many founders (myself included) quit this lifestyle because they weren't an instant success.
We all know entrepreneurship entails huge risks. However, that's no reason to not forge ahead. Most people can't seem to understand that entrepreneurship is not about money, fame or power. Those are all secondary things. Entrepreneurship is about an idea and its development. It's about developing a thought, a concept only you and maybe the 2 other people starting the venture with you understand. It takes balls and passion. It takes courage. But more importantly, it takes unrelenting love. Love for the idea behind the venture, love for the concept of creating something valuable out of just abstractions, and, ultimately, love for the better world you're helping shape with the economic impact of your plan.
I'm not downplaying the importance of following sound economic principles (e.g. do NOT put your house as a collateral for a loan). Nonetheless, if you're going to be deterred by the economy, your wife, this article, or a friend, then you clearly don't have, and probably never had, what it takes.
Of course, sometimes "what it takes" involves a degree of ruthlessness which allows you to put not only your finances, but you marriage and your guardianship of your children at stake. Different individuals have different scales on which they decide whether that kind of ruthlessness is worth the reward, even if they did have the capacity for it.
I agree. Tolerance for risk is another big aspect of all this. I'm not married. I don't have kids. So my real only concern is myself right now. Others aren't as lucky.
In the context of starting your first startup while you're still young and single: yes, you'd be lucky. Life in general: that's actually unfortunate. =)
> "Was it worth it? It comes down to deciding what horrifies you more: the possibility of waking up one day and realizing you never took a shot at your dream or the possibility of losing your house."
For him, it came down to that. Okay, granted. But this:
> "That’s what entrepreneurship is really about."
Is it? I'm starting a web-based service business, and my fixed costs are well under $100 per month ongoing, and under $500 to start up. I'm financing it by working 3 months per year doing blue-collar work, and spend 9 months per year doing volunteer work in the third world.
Obviously a one person web based start up that doesn't pay wages is going to be a lot less risky than a 40 employee business that is buy supplies in advance for each job.
But the NYT just said that entrepreneurship means caring more about your dreams than a house for your family.
Really? That's the decision people have to make to start a business? If you don't do that, you aren't an entrepreneur?
It's a great cautionary tale, but as you yourself point out, not all kinds of business have that risk. And as others point out, his problems were avoidable.
Perhaps more tragic is that in his industry he often get's a down payment of 30-50%, which is often enough to cover the costs of the equipment.
Scaling up to 40 people in the custom home installation market is very difficult. Cash flow is a big deal, and the number of rich people who won't pay you the final payment, often for reasons that are outside of your control, is staggering. (i.e. I paid you $100k and my satellite dish keeps going out on me) There's not much you can do about it when your customer has 5 lawyers on retainer.
You can make a lot more money with 2-4 talented people. This is an industry with 0% margin on flatpanel TV, 50% margin on wire and 70% margin on inwall speakers.
Likely the financial (and social family) cost of "gross negligence" litigation would well exceed any measurable benefit. If the owner has a strong case, a private settlement for 30-50% damages is the most likely outcome.
Even in the unlikely event the accounting firm broke/abused their fiduciary duties AND a circuit/general court tort verdict was in this owner's favor, it would take years for the funds to work their way through the system.
Most courts resolve small cases like this within a year or two, including appeals. Indeed, a case that lasts more than 2 years is considered anomalous unless a huge corporation or very wealthy clients are involved.
It would take about 1 week to 10 days once appeals have resolved for the funds to work their way through the system. Every state has a deadline for paying off judgments. The only reason payment of a judgment would be delayed is if the defendant declared bankruptcy.
"Was it worth it? It comes down to deciding what horrifies you more: the possibility of waking up one day and realizing you never took a shot at your dream or the possibility of losing your house."
absolutely. it amazes me how many people there are (that i meet) who fall under the umbrella of fearing for themselves rather than proactively pursuing their passions and gaining invaluable experiences in the world. better to live at home and minimize risk so you dont die.
I think it changes things a bit when there are two kids with you in said house. Living at home and minimizing risk so your two kids don't die suddenly doesn't seem so amazing.
First of all I have to admit that that I'm pretty clueless when it comes to startups, entrepeneurship, running a business (of any size), etc. Zero experience or first-hand knowledge.
I have two questions that are likely pretty basic after reading this article:
1. If the company was successful enough to be around for 20 years and have 40 employees, isn't that "successful enough" to be able to incorporate the company or form a LLC so that all debt is taken out in company name, and that the owner was on the line for debt personally?
2. Is there no recourse for hiring accountants (especially a firm) that completely failed at it's job to properly book revenue?
And instead of just shutting it down cold-turkey why not try to see if he could borrow money from the employees to keep the business afloat. I believe the article writer, his friend pushed him too fast into closing the business down especially when he had customers already and a robust work force that he could have paired down.
This is a very informative story. I'd like to give it a summarization so that the rest of us would not go into the same trouble.
1. Keep a very keen eye on your customers and selling. Mr. Baumeister sold high-end products. With economic downturn, fewer people spend money on luxueries. He should predict that when economic was going down.
2. Pay constant attention to cash flow and balance statement.
3. As a startup, don't outsource critical component. If you have to, always double check it. Seems the incompetent accounting firm played a significant role in failure of his business.
There is a second moral to this story: the person you marry will significantly determine your success or failure as an entrepreneur. In my opinion, a nagging wife who is quick to judge and blame you is one of the worst threats to your startup/business.
> Some 70 percent of businesses fail within seven years, according to the Small Business Administration.
Wrong. Very wrong. 70% of businesses are not going concerns within seven years. Doesn't mean they "failed". They might have been acquired, or closed, or a different project might have taken the entrepreneur's focus. If a guy starts two companies as small side projects, and one takes off, he closes the other. That'd be reported as a "50% failure rate" for people who can't get their head around the statistics. But they didn't fail - they served the entrepreneur during that part of his life, he learned lessons, hopefully made some money, and then moved on to bigger and better things. Starting a business is hard, but it's not this impossibly bleak predicament that people make it out to be.