As I have mentioned to you in the past, I’ve made a lot of mistakes. Luckily, most of these mistakes were small and didn’t cause much harm to my business or me personally. But on one occasion, my mistake not only brought my business down, but it also almost bankrupted me.
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 through 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 decided to expand, but we didn’t expand in a good way.
Most entrepreneurs would expand their core business and try to accelerate its 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 was into a company called Fruitcast. An individual by the name of James Archer from Forty Media pitched us a cool idea. 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:
- Ineffective advertising – Fruitcast placed advertisements at the beginning and the end of each podcast. These ads were not effective because they weren’t in the middle of the podcast. We had no way of incorporating the advertisements within the podcasts unless the hosts themselves talked about the advertisers 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 our advertisers way too much. Each played ad would cost them 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 a 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 the right questions.
The somewhat smart idea
After failing with our Fruitcast investment, my business partner and I decided to get into the software as a service space.
We didn’t know much about software companies at the time, but we did know a great deal about Internet marketing. So, we decided to create two analytics companies called Siteblimp and Crazy Egg.
Siteblimp was supposed to be a free analytics solution like Google Analytics is today. At the time, our main competition was Statcounter. But a few months before we could launch 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.
Crazy Egg, on the other hand, was supposed to be an analytics solution that provided a website overlay more detailed than any other. Overtime, the idea expanded to include a heatmap feature.
Like most businesses, Crazy Egg struggled at first. After a few years, however, it started to gain traction. It took a while to get there, but Crazy Egg is still running today, and the company is doing well.
The dumb idea
With all of the money we were spending, 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. Plus, we wasted a lot of money in ventures like Siteblimp and Fruitcast.
At this point, 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 our ideas to investors and got nowhere. So, we did the next best thing and 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. This time, we decided not to compete with Google Analytics. We shifted gears and concentrated on building a pay-per-click management software.
Unlike with 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 Portugal called We Break Stuff. Like with our Fruitcast experience, we ran into some problems:
- Communication – it was hard to communicate with a development agency that wasn’t based in the U.S. There was an 8-hour time difference, impeding communication and slowing down our process.
- Spreading ourselves too thin – my business partner and I were so busy with all of the other things we were doing that no one was properly managing our relationship with the We Break Stuff team.
- Laziness – because things moved so slowly, we lost sight of the project, which also didn’t encourage the We Break Stuff team.
- Ignorance – just like with Fruitcast, we didn’t know the space Siteblimp was in.
Similarly to our other failures, the failure of Siteblimp wasn’t We Break Stuff’s fault. It was ours.
The million-dollar mistake
The ventures I mentioned above (other than Crazy Egg) did lose me money, but they didn’t lose me a million dollars. They were just a lead-up to my million-dollar mistake.
Drum roll, please…
You would think that by then, I would have learned my lesson and stopped expanding into new industries, right? Well, think again. My business partner and I decided to use the majority of our money to expand into the web hosting arena.
Do you remember when Media Temple released its Grid System in 2006? We tried to release the same thing a year or two before they did. 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 hard to manage.
- Clashing partners – two of these 3 people were married to each other. When you have this sort of dynamic, fights can ensue. To top it off, when all of the individuals live in the same house, things can get really messy.
- Poor money management – none of these individuals were financially well off. Not only did my business partner and I had to support the business, but we also had to pay for their living expenses. This can really add up when you factor in 4 or 5 kids to be fed in addition to the team members.
- 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 a 3,000-square-foot house in Rockwall. Eventually, we found out that these people 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, etc.
Over a course of 2 years, this all added up to around a million dollars. The worse part about the experience was that our relationship with this team ended on bad terms.
Towards the end, my business partner and I had to tell our 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.
In the end, we decided that we would financially support them for a few months until they found jobs. During that time, my partner and I were selling all of the hardware we had bought for the project to recuperate some of our loses. The kicker was that in error, one of the companies that bought back some of our hardware sent a big check to Rockwall instead of Orange County.
Our partners in Rockwall fraudulently cashed the check, maliciously damaged the house, and left Rockwall without telling us.
Although I hope you won’t make big mistakes like I have made, chances are you will. But what separates the true entrepreneurs from the phony ones is that true entrepreneurs don’t give up.
If I had given up, I would have been 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 I was able to pay everyone back.
Don’t give up! Learn from your mistakes, and keep on pushing forward!