4 Failure Points that Can Undermine Your Business – Failure Point 4: Don’t Close Your Ears to Experts

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When I launched my second business, a publishing company called Sigma Communications, I was filled with passion but knew next to nothing about publishing a magazine. Without proven competence, I desperately needed guidance. Sure enough, I came to learn that the Chairman Emeritus of Time Warner, Dick Munro, was in the neighboring office. I could not imagine a better advisor for our startup publication and decided to introduce myself.

As I walked down the hall for our initial meeting, I wondered if someone of his stature would take the time to speak to an entrepreneur new to publishing. It turned out that Dick was more than willing to open up to me. He listened carefully as I told him about my idea for my magazine. But I was surprised when he cautioned me that publications usually take a long time to become profitable.

“You’ve got very lofty goals,” Dick said. “When we started Sports Illustrated, we didn’t make a profit for six years. Are you prepared to wait that long? Do you have enough funding to last six years, if necessary?”

I assured Dick that we would do whatever was needed to make our journal successful. In the back of my mind, I had a different thought: We had launched USI and turned a profit in four months. Why couldn’t we accomplish the same with Sigma? I was determined to beat the normal ramp-up to profitability in the publishing industry.

By the close of our discussion, Dick agreed to be our advisor. He immediately started reaching out to his network and introduced us to the publisher of Garden Design magazine. Garden Design‘s publisher was amazingly friendly and generous with his time and knowledge.

As he took us through the mechanics of starting a publication, he, too, explained that magazines take a long time to make money. First, we would need to build an audience. Then, we’d have to sell advertising space. He warned us that revenue from advertising would not start flowing immediately, and even then, it could be just a trickle for several years as we built our subscriber base.

Garden Design‘s publisher was straightforward and very honest. He shared that publishing a magazine was an ongoing challenge. Achieving profitability was a constant struggle with progress measured in years, not months. Because I was used to moving at breakneck speed and expecting immediate returns, I felt we could outperform the publishing industry norm. Rather than listening to my advisors, I allowed my passion for our magazine to distort my views about timing, funding, and reaching breakeven – a fatal mistake.

My unbridled enthusiasm for becoming a publisher, combined with my lack of distinctive competence, put blinders on me. I did not heed the advice of industry experts with superlative track records. Allowing my passion to overrun the common sense of listening to my advisors was Failure Point #4.

4 Failure Points that Can Undermine Your Business

In this series we have shared four failure points that can undermine the efforts of even the most seasoned entrepreneurs. Why not learn from my mistakes?

  • Failure Point #1: Starting a business based on your passion, rather than building a business based on your distinctive competence.
  • Failure Point #2: Convincing yourself that “the world will beat a path to your doorstep” without securing preorders to prove your business model.
  • Failure Point #3: Taking the risk to launch a business without sufficient funding to reach breakeven.
  • Failure Point #4: Allowing your passion to overrun the common sense of listening to your advisors

About the Authors

Ed “Skip” McLaughlinEd “Skip” McLaughlin is the founder of four businesses and is currently running Blue Sunsets LLC, a real estate and angel investment firm. He bootstrapped his first business, United Systems Integrators (USI) Corporation, a corporate real estate outsourcing firm, and grew it into an Inc. 500 company. In 2001, Ed earned Entrepreneur of the Year honors from Ernst & Young. In 2005, he sold USI to Johnson Controls, a Fortune 100 company, and at that point, became CEO of JCI’s Global Workplace Business for the Americas. A member of the Board of Governors for Tufts Medical Center, Ed founded its David E. Wazer Breast Cancer Research Fund. He graduated from the College of the Holy Cross, where he is a member of the Board of Trustees. Active in philanthropy, Ed lives with his wife in Connecticut and has three adult children. Contact Ed at [email protected] or connect with him on Twitter @purposeisprofit.

Wyn LydeckerWyn Lydecker is the founder of Upstart Business Planning, where she works with entrepreneurs to develop plans that answer the questions investors ask most often. Previously, she was Managing Director of Business Plans International in New York and Co-Director of the Small Business Resource Center at Norwalk Community College. Wyn has an MBA in finance and marketing from the Wharton School of the University of Pennsylvania and a BA in economics from the University of California at Santa Barbara. She serves on the board of a local nonprofit she helped found, At Home In Darien. She lives in Connecticut with her husband and has two adult children. Contact Wyn at [email protected] or connect with her on Twitter @upstartwyn.

4 Failure Points that Can Undermine Your Business – Failure Point 3: The Dark Side of Bootstrapping

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When we launched my publishing business, Sigma Communications, I was so passionate about the magazine, and so confident that it would be a runaway success, that I decided to self-fund. After all, I had successfully bootstrapped my first business, USI. Why couldn’t we bootstrap Sigma, too? Unfortunately, I had to learn the hard way that bootstrapping is not always best.

I came to realize that I did not properly factor the size and scale against the funding needs of Sigma. And I completely miscalculated the time it would take to reach breakeven. Sigma’s quarterly magazine, The National Register of Commercial Real Estate, consumed capital at a rate far greater than USI could generate it. Since I had never manufactured and shipped my own product before, I underestimated the continuous cash drain from ongoing production and distribution.

After almost three years of losing money, things started to become stressful. Our business model was not working as planned. Advertising revenues were slow to trickle in. While some major holders of real estate agreed to place listings, many did not. The deep recession in commercial real estate had forced corporations to freeze all marketing budgets. Many of the big real estate holders were not allowed to spend a dime on advertising, even though corporations were spending millions just to maintain their surplus real estate.

Selling display advertising to non-real estate advertisers also proved to be extremely challenging. As a new publication, we did not have an audited distribution to prove our circulation. While we planned to sell a full-page, four-color ad for $10,000, no advertisers would pay that rate. We were lucky to get $5,000 for a four-color ad and $2,500 for a black-and-white ad. When we approached big advertisers like Absolut Vodka, they said they would love to put an ad in our magazine, but they would not pay us anything for the placement because they felt their brand name gave our magazine credibility. We were forced to accept their terms.

With little advertising revenue flowing in, we had to rely on USI’s profits to fund most of Sigma’s cash needs. To make matters worse, we found ourselves spending 80 percent of our time on Sigma and only 20 percent on our cash cow, USI.

By its third year, Sigma was still burning cash. Quarterly advertising revenue was averaging $100,000 per issue, while expenses were running at $200,000 per issue (20,000 copies × $10 per copy = $200,000 in expenses). We were losing $100,000 per issue and could not forecast when we would break even. We started to hit a wall.

Generating a profit from a publication was a slow process. Sigma had begun to run an annual deficit of $400,000. We could not continue to bleed cash and rely on USI to fund the shortfall. USI needed money to fund its own growth. If we had planned properly, we would have raised enough financing to see us through the gestation period of a national publication.

Bootstrapping was not enough. We needed outside capital to reach breakeven – but my desire to maintain control and my ego stood in the way. Having insufficient funding was Failure Point #3.

About the Author

Ed “Skip” McLaughlinEd “Skip” McLaughlin is the founder of four businesses and is currently running Blue Sunsets LLC, a real estate and angel investment firm. He bootstrapped his first business, United Systems Integrators (USI) Corporation, a corporate real estate outsourcing firm, and grew it into an Inc. 500 company. In 2001, Ed earned Entrepreneur of the Year honors from Ernst & Young. In 2005, he sold USI to Johnson Controls, a Fortune 100 company, and at that point, became CEO of JCI’s Global Workplace Business for the Americas. A member of the Board of Governors for Tufts Medical Center, Ed founded its David E. Wazer Breast Cancer Research Fund. He graduated from the College of the Holy Cross, where he is a member of the Board of Trustees. Active in philanthropy, Ed lives with his wife in Connecticut and has three adult children. Contact Ed at [email protected] or connect with him on Twitter @purposeisprofit.

Wyn LydeckerWyn Lydecker is the founder of Upstart Business Planning, where she works with entrepreneurs to develop plans that answer the questions investors ask most often. Previously, she was Managing Director of Business Plans International in New York and Co-Director of the Small Business Resource Center at Norwalk Community College. Wyn has an MBA in finance and marketing from the Wharton School of the University of Pennsylvania and a BA in economics from the University of California at Santa Barbara. She serves on the board of a local nonprofit she helped found, At Home In Darien. She lives in Connecticut with her husband and has two adult children. Contact Wyn at [email protected] or connect with her on Twitter @upstartwyn.

4 Failure Points that Can Undermine Your Business – Failure Point 2: Concept Validation Is Not Enough

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At the time we launched my second business, Sigma Communications, and its flagship magazine, The National Register of Commercial Real Estate, the biggest issue facing chief financial officers and real estate executives was their surplus real estate. Capital was extremely scarce, and interest rates were extraordinarily high. The nation was awash in unsold and unleased commercial properties. Malls and office buildings sat empty, ushering in the term “see-thru buildings.”

These circumstances made the market ripe for our business idea – a central exchange for commercial real estate. We first tested our concept for The Commercial Property Exchange with a targeted group of real estate executives from Fortune 100 companies. We also made a point to engage insurance company executives because their companies had been the major underwriters of real estate development in the United States. We knew they were anxious to unload their holdings.

Since the Internet was still in its infancy, our business model called for selling classified print ads in the form of commercial real estate listings, traditional display ads, and subscriptions. For the first time, a buyer in San Francisco could easily learn about a building for sale in New York without engaging a broker. Corporations with headquarters in Atlanta could discover properties on the market in Denver without flying to the local market.

Don’t Confuse Concept Validation with Preorders

Virtually all of the real estate executives we interviewed said they could use a central exchange for surplus real estate. One executive was particularly enthusiastic. “We need a vehicle to let buyers know what we have.” With encouragement like that, we were convinced that Sigma was going to become a quick hit because it so clearly filled a need to make the market more efficient.

With validation of our concept, I made the fateful decision to launch the magazine without first testing our business model by securing preorders. With the huge number of commercial properties available, we figured we’d be raking in the advertising dollars very quickly. As it turned out, this assumption was dead wrong. Even a market flooded with surplus property needed time to adjust to a new way of doing business.

In the end analysis, I took a huge gamble on a concept business with an untested business model. As a result, we lost the opportunity to establish a paying customer base and generate an early revenue stream. This oversight cost us precious time and made our path to profitability that much more challenging.

Looking back, I realize that our neglect to prove our business model by lining up preorders for listings prior to launch was Failure Point #2.

About the Author

Ed “Skip” McLaughlinEd “Skip” McLaughlin is the founder of four businesses and is currently running Blue Sunsets LLC, a real estate and angel investment firm. He bootstrapped his first business, United Systems Integrators (USI) Corporation, a corporate real estate outsourcing firm, and grew it into an Inc. 500 company. In 2001, Ed earned Entrepreneur of the Year honors from Ernst & Young. In 2005, he sold USI to Johnson Controls, a Fortune 100 company, and at that point, became CEO of JCI’s Global Workplace Business for the Americas. A member of the Board of Governors for Tufts Medical Center, Ed founded its David E. Wazer Breast Cancer Research Fund. He graduated from the College of the Holy Cross, where he is a member of the Board of Trustees. Active in philanthropy, Ed lives with his wife in Connecticut and has three adult children. Contact Ed at [email protected] or connect with him on Twitter @purposeisprofit.

Wyn LydeckerWyn Lydecker is the founder of Upstart Business Planning, where she works with entrepreneurs to develop plans that answer the questions investors ask most often. Previously, she was Managing Director of Business Plans International in New York and Co-Director of the Small Business Resource Center at Norwalk Community College. Wyn has an MBA in finance and marketing from the Wharton School of the University of Pennsylvania and a BA in economics from the University of California at Santa Barbara. She serves on the board of a local nonprofit she helped found, At Home In Darien. She lives in Connecticut with her husband and has two adult children. Contact Wyn at [email protected] or connect with her on Twitter @upstartwyn.

4 Failure Points that Can Undermine Your Business – Failure Point 1: Follow Your Passion at Your Peril

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The ideal formula for business success is when your passion and distinctive competence align. Only nine months after opening my first business, USI – a business based on my distinctive competence – I launched a second business called Sigma Communications Inc., or Sigma for short. Starting Sigma was the culmination of my long-standing passion to create a vehicle to more efficiently connect buyers and sellers of commercial real estate. The first product I envisioned was a high-quality commercial real estate magazine listing properties for sale, lease, and sublease. (I undertook this venture at a time when the Internet was not yet widely available for commercial use.)

The Birth of Sigma Communications

Sigma’s main purpose was to provide essential real estate information to the financial officers and real estate executives of the largest 5,000 companies in the United States through a single source. We set out to publish a high-quality, quarterly magazine, The National Register of Commercial Real Estate, to share ideas for dealing with surplus real estate and to efficiently link real estate buyers and sellers through the magazine’s centerpiece, The Commercial Property Exchange. The Exchange would list surplus commercial property that was for sale, for lease, or for sublease.

When we started Sigma Communications, we thought we had all the pieces, but we were wrong.

Passion vs. Distinctive Competence

When I launched Sigma, I believed that my passion for publishing the magazine would trump my lack of competence. That proved to be a costly assumption. The hardest lesson I learned from the Sigma experience is that a venture filled with passion is not enough. You will substantially increase your probability of startup success if you build a business based on your distinctive competence. Distinctive competence is your success record of relevant experience, applicable skills, and practical knowledge that you bring to your business.

Following only your passion can lead you to make decisions fueled by fervor for your business idea instead of the knowledge and insight that comes with road-tested experience. I learned this firsthand. I lacked the experience that I believe any new venture requires in its founder. I truly knew nothing about being a publisher. And my strong passion for becoming a publisher did not make up for that void.

Failure Point #1: Starting a business based on passion alone, rather than building a business based on distinctive competence.

About the Author

Ed “Skip” McLaughlinEd “Skip” McLaughlin is the founder of four businesses and is currently running Blue Sunsets LLC, a real estate and angel investment firm. He bootstrapped his first business, United Systems Integrators (USI) Corporation, a corporate real estate outsourcing firm, and grew it into an Inc. 500 company. In 2001, Ed earned Entrepreneur of the Year honors from Ernst & Young. In 2005, he sold USI to Johnson Controls, a Fortune 100 company, and at that point, became CEO of JCI’s Global Workplace Business for the Americas. A member of the Board of Governors for Tufts Medical Center, Ed founded its David E. Wazer Breast Cancer Research Fund. He graduated from the College of the Holy Cross, where he is a member of the Board of Trustees. Active in philanthropy, Ed lives with his wife in Connecticut and has three adult children. Contact Ed at [email protected] or connect with him on Twitter @purposeisprofit.

Wyn LydeckerWyn Lydecker is the founder of Upstart Business Planning, where she works with entrepreneurs to develop plans that answer the questions investors ask most often. Previously, she was Managing Director of Business Plans International in New York and Co-Director of the Small Business Resource Center at Norwalk Community College. Wyn has an MBA in finance and marketing from the Wharton School of the University of Pennsylvania and a BA in economics from the University of California at Santa Barbara. She serves on the board of a local nonprofit she helped found, At Home In Darien. She lives in Connecticut with her husband and has two adult children. Contact Wyn at [email protected] or connect with her on Twitter @upstartwyn.