As I have mentioned to you in the past, I have made a lot of mistakes. Luckily most of these mistakes where small and didn’t cause much harm to my business or me. But the one occasion I have made a big mistake not only did it cause one of my businesses to go under, but it also caused me to almost go bankrupt.
So here is the story of my million-dollar mistake.
The early days
Towards the end of my high school career, I started my first real Internet business. The business was called Advantage Consulting Services (ACS), which consulted small to medium sized businesses on their Internet marketing strategies.
At first, like most businesses ACS struggled. But from blogging, speaking at industry events, and cold calling, my business partner and I were able to grow ACS into a cash cow.
During our peak, we were pulling in millions of dollars with high profit margins. Once ACS started to do well my business partner and I decide to expand, but we didn’t expand in a good way.
Most entrepreneurs would expand their core business and try to accelerate their growth. But my business partner and I aren’t like most entrepreneurs; we decided we would be different and expand into new ventures that weren’t related to our core business.
The somewhat greedy life
One of our first investments that we made was into a company called Fruitcast. An individual by the name of James Archer from Forty Media came to us and pitched us on a cool idea that he had. His vision was a market place similar to Overture and Google AdWords in which companies could bid to have their advertisement in certain podcasts.
For example, a company such as GM could go onto Fruitcast, browse our podcast inventory (which we got from publishers) and bid to have their advertisement placed into the podcasts of their choice.
There were a few problems with this though:
- Ineffective advertising – Fruitcast placed advertisements at the beginning and end of the podcast. These ads were not effective because they weren’t incorporated into the podcast, such as in the middle. We had no way of incorporating the advertisements within the podcasts unless the host themselves talked about the advertiser within the show. And although we could convince some podcast shows to do this, we didn’t have advertisers lined up ahead of time.
- No ROI – We charged way too much to the advertiser. Every time a podcast was played with their advertisement they would be charged 5 cents. I know that doesn’t seem like a lot, but it adds up really quickly.
- We rushed in – The biggest mistake we made with Fruitcast was we didn’t ask James enough questions before writing him the check. When we gave James the money for the company, we didn’t know that he wasn’t going to work on Fruitcast full time. By no means was this James’ fault, it was ours for not asking him if he was going to work on it full time.
The somewhat smart idea
After failing with our Fruitcast investment, my business partner and I decided it would be wiser if we spent some of our money getting into the realm of software as a service.
We didn’t know much about software companies at the time, but we did know a good amount about Internet marketing. So we decided to create two analytical companies called Siteblimp and Crazy Egg.
Siteblimp was supposed to be a free analytical solution like Google Analytics. At the time our main competition was Statcounter. But a few months before we were planning on launching Siteblimp, Google bought Urchin Analytics, made it free, and then released it as Google Analytics.
Because of that we decided to scrap the Siteblimp project and not invest any more money into it.
Crazy Egg on the other hand was supposed to be an analytics solutions that just provided a website overlay that was more detailed than any other analytics solution. And overtime the idea expanded to include a heatmap feature.
Like most business, Crazy Egg struggled at first, but luckily after a few years it started to gain traction. It took a while to get there, but to this date Crazy Egg is still running and the company is doing well.
The dumb idea
With all of the money we were dumping around, sooner or later my business partner and I were getting strapped for cash. Although ACS was doing well, it took a ton of money to keep businesses like Crazy Egg alive and sadly we wasted a lot of money in ventures like Siteblimp and Fruitcast.
At this point in our lives we started to look for outside investors who would be willing to give us some cash in exchange for a percentage in our business.
We spent around 6 months pitching investors and got nowhere. So we did the next best thing and we took money from our family members and the bank.
Once we had a good amount of cash in the bank we decided to give old Siteblimp one more shot. But this time we decided that we weren’t going to compete with Google Analytics, so we shifted gears and concentrated on building a pay per click management software.
But unlike Crazy Egg we didn’t hire in house employees to create the software, we decided we would use contractors because it would be cheaper.
We hired a firm out of the Portugal called We Break Stuff. And like our Fruitcast experience, we ran into some problems:
- Communication – it was hard to communicate with a development agency that wasn’t based out of the U.S. There was an 8-hour time difference so we couldn’t communicate enough, which lead things to move slow.
- Spread too thin – my business partner and I were busy with all of the other things we were doing so no one was properly able to manage our We Break Stuff relationship.
- Laziness – because things moved so slowly we lost sight of the project, which also didn’t encourage the We Break Stuff Team.
- Ignorance – similar to Fruitcast, with this new Siteblimp product we didn’t know the space.
And similar to our other mistakes, the failure of Siteblimp wasn’t of the result of We Break Stuff. The failure was our fault.
The million-dollar mistake
Now the ventures I mentioned above (other than Crazy Egg) did lose me money, but they didn’t lose me a million dollars. Instead, what they did do is help lead up to my million-dollar mistake.
Drum roll please…
After the ventures I mentioned above failed you would think that I would learn my lesson and stop expanding into new industries, right? Think again because my business partner and I decided to use the majority of our money to expand into the web hosting arena.
Do you remember how Media Temple released their Grid System in 2006? Well, we were trying to release the same thing a year or two before they were. We were going to call the company Vision Web Hosting.
Here is where we messed up:
- Location – we found 3 talented employees in Rockwall, Texas. Because they were based in Rockwall we decided to set up base there which was a bit far from Orange County, California. This made things a bit hard to manage.
- Clashing partners – out of these 3 individuals two of them were married to each. When you have this sort of dynamics, fights between business partners can get really messy. And to top it off when all of the individuals live together in the same house, it really gets messy.
- Poor money management – none of these individuals were financially well off. Not only did my business partner and I have to support the business but we also had to pay for their living expenses. This can really add up when there are 4 or 5 kids to feed.
- Feature creep – the management team in Rockwall continually came up with ways to improve our product offering. This caused tons of additional expenses and it delayed the launch of the company.
- Poor communication – we were running Vision Web Hosting out of their 3000 square foot house in Rockwall and eventually we found out that they didn’t own the house. The owner of the home wasn’t happy with the situation so we had to purchase it from him for around $200,000.
- We didn’t know when to say no – when you give people a bit, they start asking for a lot more. Sooner or later we were paying for things like medical treatments, groceries, gas, car payments…
Over a course of 2 years, this all added up to around a million dollars. The worse part about the experience is that it ended on bad terms.
Towards the end my business partner and I had to break it to the 3 partners in Rockwall that we couldn’t keep the business afloat. We were losing thousands of dollars every month and it was adding up very quickly.
So in the end we decided that we would financially support them for a few months until they found a job. And during that time my partner and I were selling all of the hardware we bought to recuperate some of our loses, but by mistake one of the companies that bought back some of our hardware sent a big check to Rockwall instead of Orange County.
This eventually led the partners in Rockwall to fraudulently cash the check, maliciously damage the house, and leave Rockwall without telling us.
Although I hope you won’t make big mistakes like I have made, the chances are you will. But what separates the true entrepreneurs from the phony ones is that true entrepreneurs don’t give up.
If I gave up, I would have been around a million dollars in debt and I may have never paid my family members and the bank back. But because I kept on moving forward things turned out well and eventually I was able to pay everyone back.
Don’t give up! Learn from your mistakes and keep on pushing forward!