She had a great idea, and unlike so many dreamers, she knew how to make the idea work and acted. Designer fabrics, specially developed, specially packaged, colorful, a catchy Marimekko with a lighter touch. It made sense. She’d studied design, was a closet artist in her youth, had worked in advertising for a while, the creative side, and she was very convincing − as in “this will work” type of convincing.
She designed twenty coordinated products, and did the clever thing by literally going to China to find an agent and factory that would produce these products for her. At the time, some people were doing that, but not a lot of people, so she was able to very quickly acquire a full sample run, fully packaged, and ready to sell to department stores, specialty stores, boutiques, and some furniture stores. With samples in one hand, order book in the other, she sold a full run, all 20 products, first time out. Spectacular for a first time run, sales $100,000. Gross margin $36,000. Not bad for Lap 1.
In those days each iteration took about four months. Factoring in the reality of the retail year where significant stretches are a desert, dry and sterile (like January and February), she could do two product runs a year, design, manufacture, along with packaging, deliver, and then sell her brains out. Home life became a little strained but her father and mother put up half of the initial capital and a home equity line of credit provided the rest. Her mother also kept the books, and her husband understood − he was thrilled to see her take off. He was a banker, not the person you visit to get new checks or to confirm the balance of your savings account. He invested the bank’s money, in new ventures. He was sure she was on to something and although he couldn’t invest his bank’s money in her business, he could see a potential winner developing, and was rooting her on while covering three quarters of their child taxi service runs, operated by all families with three children under the age of ten.
Year 2 was a bigger success, and Year 3 was bigger yet. Now branded as “Cotton Mary”, revenue was just north of one million dollars, margin was $321,000. Mary paid herself a modest salary, paid off her parents, and set about designing fabric and products for Year 4.
By now, anyone who knew Mary, her husband, her children, or her parents, knew she was doing something unusual: the designs were in more stores, and a local buzz developed… “you know those fabrics, Cotton Mary something or another!” And it was probably that bit of buzz that attracted The Inkwell Capital guys (and yes they were all guys).
“Mary, Josh of Inkwell here.”
“Oh Josh, yes, how are you?”
“Looking forward to meeting you in person Mary, I wonder if you have an hour or so you could spare us?”
“Sure Josh, when can you come by?”
That’s how is started, simple enough. Josh and the guys came over, talked to Mary on several occasions between her: designing for the next run, adjusting contract terms with her agents in China, renegotiating shipping arrangements for the Year 4 Part 1 products, and hiring a full time bookkeeper/CPA to help her and her mom track numbers, pay the bills, manage meagre cash, collect a long outstanding receivable from a Fortune 100 retailer whose headquarters are in one of the smaller southern states but whose payables department has been outsourced to the Indian sub-continent.
Inkwell, after a month of coffees and chats, made a proposal.
“We at Inkwell are investors. We like your company and your track record. You fit our ‘One in a hundred’ profile: that is, we see one in a hundred businesses in your place, time, and market space that have a much higher probability of taking at least two quantum jumps beyond current levels of operation. That is to say you are at a million in revenue right now, and relying solely on native cash flow with limited receivable financing, it will take you something like four or five years of operations, assuming you continue to experience a following wind (good luck), to get to the 10 million in sales… two revenue stages (“quanta”) beyond where you are now.
Additionally four or five years may be too long a time to competitively navigate the space between where you are now and say the 10 million in revenues…. This slower pace of development is fraught with peril. We at Inkwell can provide you with capital and expertise to move you to the 10 million dollar level almost immediately. By doing this, you avoid the vagaries of four years organic growth in a wildly competitive bottom feeding retail market for cloth goods, housewares etc. Also you skip right over all of the other “Cotton Marys” there are currently trying to make their way through the food chain to the 10 million in revenue place that you’re shooting for. These competitors are invisible to you because they’re small and geographically distant but they’re out there, and we suggest you just pass them by. Who in the world of sports apparel saw Lululemon coming?”
“And what is the price for this new, more certain reality?” asked Mary.
“We invest, you have partners, you have smaller percentage of a bigger, more sure outcome, we help guide you in a co-investor capacity, to the 10 million dollars or above revenue place and we all have many more options going forward for a big success.”
Of course it was more complicated than that, but Inkwell’s offering was, in the great scheme of things, pretty standard.
Mary talked to her husband, who thought it was a really good idea, her parents, who were less excited but “whatever you want dear, this is your company,” her friends, her CPA “don’t do it, you are giving them too much” and her lawyer, “you have to make this call, Mary, I’ll vet the agreements if you decide to go ahead.”
By now, heading into Year 4 of Cotton Mary, she was feeling beaten down by the increased complexity and demands that came with growth, and Inkwell’s experience and promise of help were, at that very moment uniquely appealing, although she had never worked with them before. They were successful investors with three local good-time-stories that matched up with what they were proposing for her and her business. And she was tired of going it alone.
Papers vetted and signed, investment made.
The Year 4 budgets were rewritten, expanded with marketing help, logistics help, a much larger line of credit, and most noticeable, an $8 million top line. As she weighed into the designs, set the contracts in China, she had one eye on these amazing numbers, and the other eye on her new partners. She couldn’t bring herself to order products at a $10 million a year run rate. “Look I have always been able to sell what I make, but ten times more is, well, it just feels like too much.
“Not to worry,” said the four newly minted Inkwell board members (investors). “We’ll settle for an $8 million year, and break-even bottom line is fine with us too. Does that reduce the pressure? We’re not looking for profit at this point; we’re going for market share. We want to cut off the sunlight from any unnamed and heretofore unknown competitors. So let’s budget for $8 million, this year and $10 million next year, and when we’re past $10 million we’ll shore things up a bit.” This was of course code for get ready to sell/go public/flip the investment/sell to other investors who may want to take Cotton Mary to the next, “next step” as Mary called it, still not really able to imagine it.
Jump over that future,
jump over the moon,
little boy blue and
a dream and a swoon….
That’s what it felt like, the next two design and manufacturing cycles (aka Year 4). She designed and they made $8 million of product (wholesale), and twice Mary went out into Retail Land and sold, only this time she couldn’t sell it all. Scaling up from $1 million to $8 million in orders is more than 8 times the effort. In fact the way things were going in her Chinese factory, it was more like 8 to the 8th power of work (and problems). Mistakes broke out like measles in a nursery school, spotting her little children, upsetting her old customers and then, at the worst time, the run up to Christmas buying season, it was as if the whole supply chain:, materials, colors, packaging, assembly, shipping, turned on itself, acquiring not just measles but some horrible, unpredictable auto-immune disease. Open any shipping container and guess what was inside…. No don’t, it’s a mess!
Mary spent much of Year 4 on airplanes, between agents and shippers and packers and manufacturers in the far east and mobs of very angry customers in the west. She ultimately was able to sell $4 million at retail for the year, and wildly exceeded the “no profit” mandate. It was her first year with a loss, a whopper, $540,000 in the red!
As the Christmas season overtook them all, and as the Cotton Mary product (such as it was, reduced availability, irregularly delivered to the retailer) sold through, she fell into her home for the kids’ Christmas break, exhausted, disillusioned, and more than a little concerned. What the hell was going on? What happened to jumping over the competition? Did these people know what they were talking about?
Christmas was a diminished affair. Oh not the family part − the kids were great, big dinner at her parents, enough presents to feel like a celebration. But as the feast of the Epiphany was upon them, she attended the Year Five planning meeting at Inkwell.
“Yes Mary, that was a surprise for us too. But I’m afraid we’re going to have to power ourselves through it.”
“Sorry, power through what?”
“Well, we’ve reviewed the Cotton Mary numbers, and our investment. It was felt that reducing the goal last year from $10 million to $8 million was a very large concession: we gave up too much and a couple of our contributors are grumbling. So to get things back on an even keel, we’re going to have to prop them up a bit going forward. They want to get to the next place, as I told you last year, and given their distaste for surprises, well let’s just say our original $10 million revenue target won’t pass muster. They want you to budget for $12 million, and they want you to break even or better.”
“I can budget anything you want, only I don’t know if I can make and sell products at that level! Weren’t you watching what happened last year?”
“Yes well, we’ve decided that last year was an anomaly. We believe you gained valuable experience and we’re willing to continue supporting you with larger staff numbers to help out with the work load, but we have to see a faster run rate, we have to get to the next place, this year.”
“You’ve done this before, right?” asked Mary.
“Of course, and now you are going to do it. You do want to do this, don’t you, Mary?”
“Yes, of course I do, only I am not as convinced as you are it will come out any better than last year.”
Year 5 sales $6 million.
Chaos on China Side.
Retailers dropped Cotton Mary in frustration because of consistently inconsistent product delivery and worse, poor product quality.
The store buyers who had been Cotton Mary’s advocates just disappeared, as if evaporated.
Inkwell Investment terminated.
Cotton Mary, a great name, might someday be rehabilitated, but it would take lots of time on a back shelf in the dark. Maybe in five years it could be resuscitated, brought out into the sunlight again, maybe.
Mary herself? Well as you can imagine, she feels gutted, stunned, injured, disillusioned. Give her credit though, she takes it all on herself. Even though she still can’t figure out what had really happened, she does know that it was a disaster and she was “in charge”. The hardest experience was coming up short, time after time, never seeming to get ahead, surprise after surprise, all of them bad. She also couldn’t get over how fast the change took place from being a small business that worked pretty well one moment, to a larger, better funded, and populated business that couldn’t catch a break, no matter what!
Mary started a business and made an early success. As with any start-up it was hard, but, unlike most, it was, in its first iteration successful. As we all know, most fail.
She lacked a broad perspective about managing the different levels of enterprise, but was able to figure it out as she went, slowed (fortunately as it turns out) by dint of almost no capital, and very little comparable experience. She had to pay and learn as she went. This is not a bad thing.
She made a somewhat impulsive decision to “pre-sell” the business (Agreeing to Inkwell’s proposal). She felt alone, she was struggling with the increased complexity of “her brainchild” growing bigger, and the day to day tugs of claustrophobically tight resources, all the while performing many roles at a frantic pace. All of this was happening in concert with other age-specific and societal forces combined to make for the busiest time of her life…. First time entrepreneur CEO, in her mid-thirties, married, two career lives, three children. Both she and her husband would never be busier! She thought Inkwell would know how to make the Cotton Mary experience integrate better for her. She expected they would give her the professional support and advice she felt she was otherwise lacking. Also, the whole idea of achieving “the next level”, the sense of getting above the messiness and energy-sapping slog of doing everything, or almost everything, herself, was immensely attractive.
And the idea of moving, if just for a moment, from the tactical to the strategic was like a shot of adrenaline − it really appealed to her. Finally there was a greater arc for her to shoot for, the “future state” that was way out there, where her business was bigger, less messy, more sustainable. She would drive the business and Inkwell would help her describe the arc, they would confirm her hesitant observations, they would encourage her with their experience in such matters. That’s how she saw it the day she signed the papers.
What she didn’t see, even though it happened right before her eyes, was that once the papers were signed, Cotton Mary became a different company.
Inkwell, for their part, didn’t lie but were pretty good actors. They had something to offer, capital, investor experience, and they had a reputation of success in early stage business investment. Although they would have never said this to Mary directly, at least not during the romance period, they were a “one out of seven to one out of ten” investor. Inkwell would raise an investment fund, make these early stage investments according to some internal secret sauce method, and if one out of ten succeeded, they made plenty of money over all. If two out of ten succeeded, it was a bonanza. They generally operated between a good strong return (well in excess of commercial banking returns, including fees) and bonanza. Their real strength however, was managing their investors, selecting participants carefully, and of course being there at the one in ten successes. What they didn’t have was real experience at actually running these businesses.
I interviewed Mary (not her real name) several times during the year after Cotton Mary was closed. Much of her time in the “year after” was spent cleaning up the mess that a bankruptcy makes with your financial life, your personal life, your social life, and your inner life… the loss of confidence and attendant humiliation is a sobering experience. But she weighed into it with her typical high energy and “get-it-done” attitude. Hard not to admire that.
As the pieces were eventually put away, and the anxiety and emotional pain dulled, she became more curious and then introspective about the experience. As we talked, we agreed that to the extent she could make the event “real”, the better off she would be. So she talked and we parsed her experience, trying to make sense out of mistakes she ought not to have made, those she probably wouldn’t have been able to avoid, and finally, to make a realistic assessment of what we ended up calling “other factors”.
She had a business that could succeed at least in the near term. She had gotten over the initial hurdle of designing, manufacturing, packaging, selling and collecting for products in the fast moving North American retail market.
She also had paid off her small initial loans.
She created a small but developing team to help her run the business. They were growing and learning the business with her.
She had been very successful at enlisting buyers to her cause… as in Cotton Mary’s products are attractive, just a little edgy, interesting, and you, the buyer can win with your bosses because they will sell. Your customers will love them too and I (Mary) will deliver them on time and at prices that work in your store.
She underestimated the anxiety that had developed as she entered Year 3. She had done well but didn’t feel that confident about replicating it.
She had been much too passive with Inkwell. She assumed they had much more to offer her in support and experience than they did. She also assumed they knew things about the market she didn’t know, and therefore gave much greater credence to their observations about “the next level” and “hidden competitors” than she should have. She now knew she should have queried them much harder on these points.
Inkwell however did not intentionally deceive her. They told her from the start that their investment was to get her to a certain revenue level or above, that even though they might slide the timing a bit, they wanted a company successfully selling at or above 10 million in revenue, that was the heart of their investment decision. As often as they told her this, Marry was hearing something else, like “we are all in this together, and somehow we will make it work.” Inkwell was investing for one reason: to make a 10 to 12 million dollar business within two years.
Mary didn’t get a whiff of the (one in ten) model that drove Inkwell’s healthy profitability. When she did hear about it (from her husband who of course knew how this all works) she was furious, for a while.
The biggest lesson was that Cotton Mary before Inkwell was a different business after Inkwell. Before Inkwell, they were learning as they went along, all the while praying not to make a “below the water line Titanic like” mistake. That business was successful.
After Inkwell Cotton Mary was a business with greater but poorly organized resources attempting to jump “two quanta” (as Inkwell put it) worth of headache and danger. What happened instead was they jumped into complexity that was exponentially more challenging, and the framework that had successfully supported the smaller enterprise collapsed under the stress. Two years of poor luck and hyper velocity were too much for every part of the business on both sides of the ocean. It crushed itself trying to go too fast. As the danger became more apparent, the investors turned up the heat, telling themselves a story about anomalies, and aberrant outcomes. Mary, by now sensing that it might not work, just caved. She wasn’t in control yet she controlled everything…. the $$12 million budget set the line for the investors who were operating on the one-in-ten world and if Mary wasn’t going to get to one-in-ten, they didn’t want to keep pouring resources into a loser. So this is it, this year or bust.
And so bust it was.
Her biggest finding, of course, was that she should have declined the Inkwell offer. Mary didn’t really need that much more capital at that point; she was growing fast enough. What she did need was the three or four more years of growing, succeeding, acquiring reliable experience, building a team, and developing better and better methods. What she needed was what Inkwell offered to help her avoid.
Today, much to her surprise, Mary is consulting. It turns out that there are many developing businesses that want advice about how to work in China, sell in North America and collect receivables from somewhere on the Indian sub-continent. Last time I checked, the jury was still out on whether she might dive back into business with an operating company again or not. She is earning very well, her advice is invaluable and appreciated by her clients. She is growing at a reasonable rate, and paying her way as she goes, out of debt and distancing herself from the shame of “failing”. She does miss the design work though, the artistic part of Cotton Mary, but she does not miss the anxiety.
“Scalability” is a word (OED first reference found in 1944). Defined as:
1. ability to be scaled or climbed.
2. ability to be changed in size or scale.
But being a word doesn’t mean that it is true. The word that was missing in Cotton Mary’s deal with Inkwell was “velocity”. In this story, everyone missed that one.