You have a great idea for an IT product, and you've already signed your first customer. A global services firm is willing to invest $1 million in your start-up company and plans to market your product worldwide. What could go wrong? Well, many things did go wrong for Kelly Hansen, who launched Prism as a managed security services provider in 2000 and ended up being personally liable for US$5 million in debt.
Hansen paid US$2.5 million to walk away from the whole affair, and is now CEO of Chicago security consultancy Neohapsis. "I've learned from my mistakes," the businesswoman says, adding that she will "always be an entrepreneur. You've got to have some skin in the game."
A tough skin, unswerving commitment and the discipline to not take on more than you can manage are some of the characteristics that separate the inexperienced entrepreneurs from those who recovered from unsuccessful start-up businesses. Their experiences illustrate missteps to avoid.
With a US$2 million line of credit from a bank, Hansen launched Prism as a spin-off of Sun Tzu Security, a Milwaukee information security consultancy she established in 1996. Prism was set up to provide intrusion-detection outsourcing and firewall maintenance to a subsidiary of a Fortune 50 company, which Hansen declined to name. "The customer didn't pay us for nine months," she says. "It is terrible to rely on a single, large client that will pay when and if it feels like it."
On top of the cash-flow problem, Prism was getting nowhere with the strategic partner with which it was negotiating a US$1 million investment and marketing deal. The partner couldn't figure out how to sell Prism services alongside its own and kept adding new provisions to the contract before the deal was signed. The new provisions increased Prism's debt to the partner from US$1 million to US$3 million. With no money coming from the customer and the bank money running out, Hansen agreed to the deal and waited for venture capital funding. However, the financing fell through when the dot-com crash occurred.
Prism attracted other potential customers, but they had no budget to buy services after being stung by the recent Y2K fix-it hype. Prism was closed in November 2002, leaving Hansen personally liable for US$5 million in debt - US$3 million to the partner and US$2 million to the bank.
"The good news was that I managed to negotiate the debt to the partner to US$500,000 from our strategic partner and the final price tag was US$2.5 million," which was a combination of bank debt and repayment to the partner. Hansen also was able to sell Sun Tzu (minus Prism) to Neohapsis.
A faltering focus
Finding paying customers was not a problem for Jet Engine Consulting, which launched in St. Louis in 2003. Its problem was that it became complacent and for about five months put all its energies into one customer. "The customer paid its bills but suddenly it told us we were too expensive and offered to buy us out and have us as their employees," says Harry Brumleve, Jet founder and president.
Although Jet's goal was to provide high-level IT consulting, its consultants had to roll up their sleeves to finish the projects they recommended. "Our company was not designed to augment staff to help finish projects. If we continued to operate like that, the same thing would happen again with other customers," Brumleve says.
The company took two days to figure out its next step. Brumleve recently negotiated a six-month contract and an 18% fee-reduction with the customer and persuaded another former client to jointly develop a software application for the airline industry. "We want to do something for us, not just help other companies live their dreams. This is part of the reason I became an entrepreneur," he says.
But being too ambitious also could bring your downfall. Spurred by the e-commerce craze, Eldad Moraru in 1999 helped set up eStoreUSA, to provide e-commerce Web site design and hosting to small and midsize businesses.
To sustain its fee of US$199, eStoreUSA had developed a technology that let it build Web sites very quickly. To sustain its low rate of a maximum one-time, setup fee of US$495 and a maximum monthly service of US$199, the company sought to sign up 4,000 customers and employ 160 staffers by the end of 2000.
As senior vice president of business development for eStoreUSA, Moraru was responsible for snagging a strategic partner, such as domain registrar, that would help market eStoreUSA to its customers. But these companies either wanted to host eStoreUSA's technology at their own facility, which was technically impossible to arrange in a short time period; or felt that they could develop the site-building software themselves.
By March 2000, eStoreUSA began to run out of money and shut its doors at the end of the year. "We can't blame it all on the dot-com bust. Trying to get thousands of clients overnight was unrealistic," says Moraru, who is now a real estate agent. "At the end of the day, business is all about relationship-building."
Reluctant to take risks
But getting a fledgling company off the ground is often the first test of an entrepreneur's mettle. In 1986, Pete Wilson, a former Sprint and MCI senior executive, and three associates launched Telewares to develop software to help companies determine how to get the best deals from the newly deregulated carriers.
Everyone continued with their day jobs and worked in their spare time to finish the software. After about a year, it was time to raise some US$30,000 for legal fees to file patents for the technology and to sell the product. But no one was willing to give up their job. "I had fear of failure. I feared that I would put my family at financial harm if it failed," Wilson says. The founders decided to put the next stage on hold for two years, but they never returned to the idea and the company fizzled out. By then, other companies began to appear with competing products.
Wilson did retain the company name, though. He worked in the telecom industry for another nine years and then decided to quit his job as director of Sprint's markets and business group to relaunch Telwares as a telecom pricing consultancy.
"You've got to back up your beliefs with action," Wilson says. "I was still a little nervous but I made it happen. I was 38 years old, had always dreamed of having my own business, and it was time to put up or shut up."