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May 13, 2003

Where Cnation went wrong: lessons in business.

While in LA I had a chance to talk to my friend Matt, whom I started and finished Cnation, my last company, with. I'm going to write a brief history of Cnation in another entry in case you don't know. We were young and naive and this was our first foray into the business world, much less running one. In hindsight, we didn't do such a bad job for our first business. Obviously we didn't do everything right or Cnation might still be around. I'm also writing an entry on what I got out of the Cnation experience, but thats another matter. I know this may be a sensitive topic for those who worked at or invested in Cnation, but I think its behind everyone at this point.

Of the things we did right, the respect for our employees was our biggest achievement. We really cared for them and wanted each of them to be as successful as possible. We did not have an us and them mentality as in most companies. Whether the company would still be here if we had not made the mistakes we made is debatable. I personally do not think it would. All of our competitors went out of business the same time we did. There was such a panic in the industry, I really don't know what could have saved it. Plus, most of our clients were dot-coms, who coincidentally went out of business at the same time the web shops did. :)

We did make a couple very expensive mistakes however. The biggest single mistake was by far hiring Steve. Its not that he personally cost us a lot of money (though he did), as much as the ramifications of the decisions he made during his tenure. I think other businesses can learn from these mistakes. OUR first mistake with Steve was trusting him as much as we did. As the owners we should have scrutinized his actions more, but we blindly believed he was doing what was best for everyone. He certainly lobbied enough to keep us out of his affairs, which should have been our first sign.

By the end of '99 we had a large amount of cash on hand. What was done with that cash was a huge mistake. We DID need to move if we were going to grow. At the time we had no way of knowing the industry was on the brink of disaster. Our plan from the beginning was to NOT spend all of our earnings on the move, but only a portion of it. We also had parameters on how much we thought we should spend each month on Rent. Without our knowledge or consent, that all changed. Indeed, we didn't know by how much we'd blown through our money on the move until after Steve had left. Between Steve's $60,000 wall of shame, all of his late architectural and construction changes, and the rent which was over double what we had expected, all of our profit from '99 was gone before we could count it.

What should have we done with that money? Firstly we should have paid off any debt we had. Secondly, we should have put some away. Thirdly we should have distributed some of that money to shareholders. Unfortunately, the real losers were the founders. When it was all said and done, it was the founders who were left with massive amounts of debt. I believe our employees were paid well and with only a few exceptions, not asked to take pay cuts or forgo paychecks for any length of time. Meanwhile I'm left with six digit debt. I won't completely blame that on Cnation. Sarah and I probably could have spent less during that time, but we were hardly big spenders. Our only large indulgent purchase was our car and even then it wasn't that insane given our income. Our rent was not insane and we did not take vacations or purchase other insane luxuries. A lot of our personal debt came from helping the company when it needed it. Like paying for the $1000 social hours personally when the company couldn't.

Which brings me to my next point. I do not think people, or new companies understand the cost of the varying forms of debt. We didn't. In many instances, it is necessary for a company to borrow money. One just needs to realize the consequences of the varying FORMS of debt. For one, I don't think a company should ever force its founders, officers, or employees into debt. By force I mean borrow money from them above their means. If a founder wants to invest in the company thats one thing, but if he/she does it on debt himself its just too dangerous. Along the same vein, secured loans or LOC are never a good idea. Things would definitely be different today, even if the company had still folded, if it had helped get the founders out of the debt it had created.

Our first president, David Simon, used to say that the top priority of a public company is to increase shareholder value and that the top priority of any private company was to decrease tax liability. It seems overly simplistic, but there's a lot of truth in it. In '99 we were trying to sell Cnation. Steve thought that showing a large profit on our '99 tax return would help us out. It also broke that cardinal rule stated earlier. A small company should never feel guilty for avoiding taxes in mostly legal ways. Remember, the largest corporations in America pay little to no taxes. In some instances, the government ends up owing them money. It was worse for Cnation as an LLC because technically, it was the responsibility of the shareholders to pay that debt. By reporting a large profit on our taxes, I (and the other founders) ended up with 5 digit tax debt, on top of the taxes we already paid. I am still paying off my '99 taxes to this day. Any purchasing company would have understood there being two books, one for taxes, and one for acquisitions. Without explanation, they would have understood why we showed small gains, or even a loss on our taxes, but claimed to have a large profit.

Finally, and most controversially, the issue of what we did with our employees as we ran out of income. We felt a tremendous amount of loyalty towards our employees and were very hesitant to lay any of them off. We believed that keeping them as long as we could was in their best interest. I now doubt whether this was true. After getting laid off, almost all that tried have gotten better paying jobs. In order to keep paying their normal salaries, we had to delay paying payroll tax. As it turned out, this delay became indefinite. The cost of this decision is not even totally known yet. One could easily argue that we had to keep people as long as we could to make us more attractive to a buyer, and who knows.

Like in all things, it was no one thing, but rather a chain of events. If we had had more money we would have paid our payroll tax. If we had distributed money, we probably still would have gone out of business when we did, but at least everyone would be in better shape. There are a hundred permutations. One things for sure, its not enough to come up with an idea and start a business. A friend of mine who is just graduating from business school wants to believe it is.

In the final analysis, I'm sure I'm much more business savvy given my ability to look back on Cnation's rights and wrongs. Yet, I'm STILL not sure how to be successful in business. There is still so much out of your control, and so many companies who you'll compete against who'll cheat to win (and they will)... It might also be that I'm just jaded from my Cnation experience. Only time will tell.

Posted by wonko at May 13, 2003 12:46 AM

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Comments

YOU'RE RIGHT!!!!!!!!!!!
You are jaded from your Cnation experience.

Posted by: obigabu at May 13, 2003 08:32 AM

Whatever, you're still overly optimistic and naive! :)

Posted by: Wonko at May 13, 2003 09:36 AM

You live in denial. We have had this conversation sooooooooooo many times, but here goes again. You and your partners accomplished more than most people can ever even dream. Your guy's story is so interesting and motivating. It was you guys who came in without any real practical experience into a brand new market and ran a business successfully for a good many years. The most interesting part of the entire story is that you guys were kids. Now I could go on for hours and hours about your sucesses but I will simply pose this to you. If you were unsucessful then you were unsuccesful compared to what?
COMPARED TO WHAT?
Because I'll give you a 500 page document single spaced with all the companies that can not compare to the sucesses you had.
COMPARED TO WHAT?

Posted by: obigabu at May 13, 2003 04:43 PM

Don't get me wrong, I agree in many ways. What we did was amazing. I am proud of the company we made and our accomplishments. The difficult part is knowing what we know now, I still am not sure we would have been able to continue. They say hindsight is 20/20. But often hindsight is blinded by perspective. It would be easy to say, it would have worked out had we done this or that differently, but one of the biggest lessons I took away from the whole thing was how unfair the business world really is. Its not about hard work, or good products, elbow grease or know how. Its about ruthless greed. Whoever is willing to be the most greedy wins. Its like Walter Mathough's quote in Fail Safe, "The only people worth surviving are those that do survive." The system is set up that way.



This is a good segway into my next LONG post. :)

Posted by: Wonko at May 13, 2003 10:14 PM

1962, four nervous young musicians played their first recording audition for the executives at the Decca Records recording company. The executives were not impressed. While turning down this group of musicians, one executive said, “We don’t like their sound. Groups of guitars are on the way out.” The group was called The Beatles.

In 1944, Emeline Snively, director of the Blue Book Modeling Agency, told modeling hopeful Norma Jean Baker, “You’d better learn secretarial work or else get married.” Norma Jean later went on to become Marilyn Monroe.

In 1954, Jimmy Denny, manager of the Grand Ole Opry, fired a singer after just one performance. He told him, “You ain’t goin’ nowhere son. You ought to go back to drivin’ a truck.” The young singer went on to become the most popular entertainer in the world as Elvis Presley.

When Alexander Graham Bell invented the telephone in 1876, it did not ring off the hook with calls from potential investors. After making a demonstration call, President Rutherford B. Hayes said, “That’s an amazing invention, but who would ever want to use one of them?”

When Thomas Edison invented the light bulb, he tried over 2000 experiments before he got it to work. A young reporter asked him how it felt to fail so many times. He said, “I never failed once. I invented the light bulb. It just happened to be a 2000 step process.”

In the 1940’s, another young inventor named Chester Carlson took his idea to 20 corporations, including some of the biggest in the country. They all turned him down. In 1947 – after seven long years of rejections he finally got a tiny company in Rochester, New York, the Haloid Company, to purchase the rights to his invention, an electrostatic paper-copying process. Haloid later became the Xerox Corporation we know today.

Wilma was the 20th of 22 children. She was born prematurely and her survival was doubtful. When she was 4 years old, she contracted double pneumonia and scarlet fever, which left her with a paralyzed left leg. At age 9, she removed the metal leg brace and began to walk without it. By 13 she had developed rhythmic walking, which doctors said was a miracle. That same year she decided to become a runner. She entered a race and came in last. For the next few years every race she entered, she came in last. Everyone told her to quit, but she kept on running. Soon she started to win the races she entered. Eventually this little girl, who was told she would never walk again, went on to win three Olympic Gold Medals. Her name was Wilma Rudolph.

The moral of the above stories: Character cannot be developed in ease and quiet. Only through experiences of trials and suffering can the soul be strengthened, vision cleared, ambition inspired and success achieved. You gain strength, experience and confidence by every situation where you stand and look fear straight in the face. You must do the thing you cannot do, and remember, the finest steel gets sent through the hottest furnace. A winner is not one who never fails, but one who NEVER QUITS! In life, remember that you pass this way only once! Let’s live life to the fullest, and give it our best!

~ Author Unknown ~

Posted by: obigabu at May 14, 2003 01:03 PM

While you're stories illicit the desired fuzzy emotional response, they remain anecdotal compared to statistics. I'm not arguing the importance of character and not giving up. I'm just saying that as it relates to business, the statistics give a very different picture. For every Xerox there are a thousand Cnations. Even the book you, (Obigabu) gave me talks about how you shouldn't play the stock market because for every story about someone who bought IBM in the 60s and made a killing, there are thousands of stories of those who lost. It seems obvious to me that doing business in today's world requires a lot more than character. In fact, it requires little actual character at all. In many ways character only gets in the way. What is really required is ruthlessness. An almost lack of soul that gives one the ability to make the right decision regardless of the human consequence, be it cultural or individual. In this case the right decision is the decision which makes your company, or you more money.



After reading your reply, I DO see an obvious career as a motivational speaker in your future, or maybe a politician. Both of those types of people take advantage of human emotion by using personal anecdotes to illicit responses that, given the statistical truth, would be ludicrous otherwise. You're good at that. :)

Posted by: Wonko at May 15, 2003 08:30 AM

Jesus... it's like a really awful, feel-good email forward :)

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Posted by: Wonko at May 15, 2003 12:54 PM

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