Anatomy of a Death Spiral: the Inside Story of the Firesale of a 7 Figure Business

I recently sold my business – a business that I had for 7 years and concluded my involvement in it.

I sold out a longtime friend/client/ally for a fee that represents some of the value in the leads, contacts, processes that were working well, but we didn’t get the multiple that one would hope for after this time.

But that wasn’t his fault, that was mine.

Because I was actively working it, I wasn’t free to talk about things.  Hard to admit mistakes when clients can find the information.

The sale straddled 2018/2019 but the business really got away from me in about 2015. I made mistakes that made it into an inadvertent Ponzi scheme, and never recovered despite working hard.

The process of watching it slide sucked. There was very real grief involved.

I’ve wanted to have a reckoning of every major mistake that I made, or every factor. A medium-style post mortem on what went wrong.

Now that I’ve moved on, I am feel free to write this. There were many things in creating my company that I did right. But nobody needs any more self-congratulatory navel-gazing, and it’s more useful to talk about what I did wrong.

I Had Unsustainable Personal Habits.

I was really into the “rise and grind” vibe for a long time. I didn’t have a schedule that would allow for anything, and I wasted time in a variety of ways.

I was eating badly. I drank way too much to be healthy. I bought into the Valley myth of the Iconoclastic Asshole. How could I be wrong?

All of this was wholly independent of the stress that I was under. I became a caricature. I believed that I was Tony Soprano, or Walter White. One step away from doing everything right. I was more like Chris Christie or Donald Trump, delusional, angry.  Nuts

The truth was there was no time to reflect. Every moment was scheduled. I was hopping from crisis to crisis, and not storing value anywhere, not keeping up relationships.

What I’ll Do Different: I’ll maintain good habits personally, exercising, laying off the booze and I’ll make sure that work is in its box. I’ll work with more efficiency batching things and using a schedule to do what I’m supposed to do.

I Wasn’t 100% Sane. And I Isolated Myself.

Mental health is a thing. Not a lot of people talk about it.
And the pressure that I was creating was getting to me. I had thoughts that are perfectly insane. I know that I had them, I know that I believed them, but I have no idea from whence they came. The habits above interlocked with the insanity.

This manifested in what we’d say was disordered behavior. A lot of the good things we were doing were multiplied by zero because I’d take a testy remark and blow it out of proportion. Or I’d fire a designer that we didn’t wholly support.

I was creating and escalating conflicts just for its own sake.

At home, my relationship with my family was deteriorated and bananas My wife was under a ton of pressure as she was completing school. I was bitter about tuition bills, and I didn’t have the tools to address any of it correctly.

I was absent from being a kind companion, and I didn’t have first principles. Things were very bad, very bad, and we didn’t see a way away from any of it, so I largely ignored it during this time. I wasn’t really committed to being a family guy, I thought any sacrifice was worth it if I could…build some company and get some sort of business week cover or something.

What I’ll Do Differently:

Family first. Relationships first. Good, clear thinking. Easy on the booze.  Sleep / diet / exercise will all have rules that I’ll follow.

I Took On (WAY) Too Much Overhead

This was the key part of of the deterioration of our company. I knew – and know – I can sell. I felt like I needed to have some pressure on me to keep selling. I was always able to make it rain when necessary. Because I’d always sell to our expenses and spend too much time involved in delivery.

My wife is still mad about this. I went from a cheap place in the exurbs to a pricey place downtown. I went from a nut of $3600 a month in outside expenses to $15,000 a month. This created a different dynamic and a different need for cash that I didn’t have previously.

I hired people to staff up without paying attention to how well (or poorly) we were delivering our work.

What I’ll Do Differently: Profit First by Mike Michalowicz will run my life. We’ll pay off money as a first thing we do, not as a second or third.

I had No Hiring Process (Except My “Gut”)

I didn’t realize that we were in a brutally competitive talent market. That what we needed was a specialized skill. There were marketplaces for freelancers that were available to me. I am a Moneyball fan. The gist of that book is to work around warts that don’t matter, to hire for production and talent, not for potential.

But I had no rubric for warts that did matter.

I fancied myself an expert and I hired a ton of creative professionals who had warts. Some of them did matter. I had no real process in place, so I’d interview, buy lunch and make offers.

All of the “mishires” had clues. A process would have found them.

One creative director had left a trail of bodies that I would have noticed had I bothered with a little reference checking, or a deeper conversation about the story.

Another animator had never really done the work in his portfolio. Any process would have fixed this. And in many cases, I hired for affability, rather than other factors. People that need jobs get good at figuring out what you want to hear.

What I’ll do differently:

I’ll build a hiring process that is sustainable, and a general post-mortem process.

We Became A Ponzi Scheme

Because we had overhead, now we had to sell to fund it. That was fun. I got better at selling. That was also good and worked as intended, but downstream, it hurt.

I was able to close more deals for more dollars. We had a pricing scheme that offered multiple videos for cash now. The only KPI was dollars in. Not future liabilities.

We got no better at delivering, and created no processes (other than zeal) for delivering work.

All of this mean we had to hire suppliers, and fast. And as I said, I had no process. So they didn’t get “plugged in” to a system that works. A lot of our hires were poor fits. And they may have even been good fits for what we’re doing, but we didn’t have a good structure in place to organize it all.

So, what happened was that we became a Ponzi scheme. We needed new work to fulfill past orders. We then had sudden pressure on pricing that wasn’t the case when we began. We had been trapped by this.

I called this a “legacy issue.” I figured that sales would cure all, but when each sale may have been at a loss…well, it was harmful.

The lessons here:

  1. You have to pay labor costs even when work is utterly and absolutely unusable.
  2. Mishired employees generally don’t care about if the work is good or not, they want to be paid.
  3. You get the double whammy of refunding clients when the work is terrible.

What I’ll do differently:

We’ll measure the company in terms of what we can deliver, and who we can onboard and exactly when but not what we can sell.

We Took Factoring Loans

As a last ditch effort to make things work for us, we took on a Factoring loan. This loan would cover the refunds as well as some new staff to deliver work.

Don’t know what these are? Well, they are the loan of last resort for companies that have some cashflow. They charge insane markups over very short terms, but they aren’t like bank loans in that they don’t take forever to get.

Basically, we borrowed $35,000 and had to pay back $48,000 on an insane daily schedule (like $325 a day.) This was often repeated (called refactoring) at slightly better terms when there was pressure.

They were silent partners, and they were merciless. “Things aren’t working? F@#% you, Pay me.”

You delude yourself into believing that everything will work out, and I suspect that sometimes they can, but they are brutal tools, loans of truly last resort. It allowed me to kick our issues down the road. And it felt like relief when we were funded. But, the net to us was that we were in deep trouble, and we had this bandaid that also acted as a tourniquet.

We Left the Portland Community

25% of our business, and 30% of our contractors came from Portland agencies and the community. We could do some things to maintain the relationships that we had, but when it was clear I moved out of Portland, and that those relationships were farther, and that I wasn’t local (and there for the long hall) a big bit of business dried up.

I wasn’t able to get the benefits of being part of a community without contributing to the community. I underestimated the impact of this.

I moved – and the move was ultimately good for me- but it was in fact bad for the business.  I should have

We Took Our Cash-Cow to the Slaughterhouse

We got by because we sold a small part of our business to Telestream. That business was something a cash cow, paying us money over a long period of time without a lot of maintenance. This was a library of clip art that could have been the basis for a big business- we were early to the party, but we made an early version of the type of company that Videoblocks became.

We had both direct and channel sales, and it was staggering how cool that that was.

We were earning nearly five figures a month in sales and the work that we were doing wasn’t really costing more than a few hundred dollars each month on SaaS and hosting.

When things got a bit tight (and in order to pay my end of a buyout), I traded that in for a one-time payment that covered a few expenses and also had the impact of masking our problems.

What I’ll Do Differently: Nathan Barry of Convert Kit famously says that “all revenue isn’t created equally,” and any type of automated/recurring revenue is what I’m chasing.

Our Work Got Worse

In creative services, it’s ALL about the work. And honestly…how could the work get better in a situation like this? We were accelerating into some sort of chaotic failure spiral. We had a problem of being able to easily overwhelm our demand.

So, the work we delivered got worse.

Our reputation got worse.

My reputation got worse.

And I was insane, having this denial/high conflict style that wasn’t working at the time. My ego was out of hand because, after all, I built a seven figure business.

The net impact of “worse work” was that we had lost the rehires and referrals that drove our growth prior.

In the past we’d deliver good work. Almost always, that work would lead to more. Our clients were taking delivery of the work, but they weren’t getting the “Woah, who did THAT,” that we used to have (both during and after my former partner’s contributions). That created what was known as net promoter score and that built a nifty business.

A big reason for that was my former business partner’s contributions. He was a great dude. I bought him out because I wanted to create a different type of company, and because I worried about his burnout.

We would have needed to be fortunate in order to make this work.

What I Would Have Done Differently: I would have standards for the process and deliverables, and we would have enforced them at the best scale we knew how.

Sales Can’t Cure All If More Sales Makes the Problem Worse

The Factoring Loans killed us. Our daily payments denied us time to escape. That was a voluntary cancer that added too much to an already gravely wounded business. By the time we were out of the payments, our company was too much of a mess to be worth keeping.

More importantly, the impact of delivering bad work for a long time also wears on you. It erodes your confidence as a salesperson. It feels terrible, and it felt like I was not really helping anyone when I was selling.

It quickly got to the point where I knew the difference. I was no longer willing to access my network. That hurt sales. I couldn’t vouch for my own company. I was stuck selling to strangers and acquaintances, because I respected my network too much.

I knew I’d make a comeback at some point, and I’d need my network later. I kept thinking that I’d need ‘em in just a little while. That I’d get clear of the bad stuff and I’d be able to re-access them.

In retrospect, I’m glad I preserved the network I built and didn’t burn up too many relationships. It makes me trust myself more than I might have had I become cynical and tried harder to liquidate them.

What I’ll Do Differently:

I’ll focus on quality of the deliverables, quality of the business and margins. Doing work without margins isn’t fair to us.

How We Got Out Of Our Death-spiral.

We wound up having the soft-landing-to a sale. We spent a couple of years as a shabby company licking its wounds. To some extent I regret having not just crashed it into the rocks and let it go. That may have put me in a better place, than the long, slow decline. Or, when we were clear to staff it back up, but I lost confidence in delivering amazing work, but not the need to deliver amazing work.

To get out, I slowed down payments to providers (and yes, that hurt my relationships). That type of management was never a strength.

We also outsourced our work to a good-enough-for-us offshore team. We mostly got away with it and built a communication process around that. The margins we earned then paid the legacy costs. This allowed me to have a “soft landing” instead of a “brutal crash.” It wasn’t ideal, and there are good people that have good reasons to not like me very much.

Other Mistakes:

In no particular order:

  • Not automating anything: We left automation alone, arrogantly.
  • Not building a platform: This was a big mistake for us.
  • Not maintaining an email list: we were never consistent here and we never got great at it.
  • Not documenting enough things: A lot of our processes were one offs, and we never got in the habit of doing this right.
  • Not having a dashboard of true reality: We had no KPIs.
  • Not firing fast enough: We didn’t fire anyone.
  • Not pricing right:
  • Accepting unsuitable clients.

All of that stuff was, at various times, a big factor. I’d suspect that pricing was the biggest factor that I didn’t bold out, but it’s not a moral failure so I didn’t mention it.

What’s Next For Me?

I’m not sharing too much just yet.

When a dream dies, there’s some grief involved.

Processing this grief and thinking about this stuff took time. I underestimated that, and it took a while for me to be ready for whatever comes next and to put my shoulder to the wheel.  I had to heal.

I tried to create something that I wasn’t ready for yet, and it didn’t work because I hadn’t admitted and processed these lessons.  Now, it’s time to build the business I want. To use the skills that I’ve earned (the hard way) to make a company worth having for the long haul.

I’m trying to design a lifestyle-first business to support me and the team that joins me. I’ve got a promising horse to bet on. I believe in myself. I’m ready to reengage my network and to deliver good work again.

I don’t know if I’ll have the appetite to blog a ton, but I’ll be building and when cross the line from dabbling to commitment, I’ll engage here when I do.

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Christopher Johnson

Christopher Johnson is writing this blog. He's a startup veteran, having built a company called Simplifilm. This blog is about things that he's starting to - but may not actually - think yet. It publishes irregularly.
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