Surviving Epic Fail

Business owners share lessons they have learned

Not everyone who risks thousands of dollars to launch a small business rides a rainbow to a pot of gold. Within three years of starting their companies, half of all new business owners fail. Hundreds of local companies have failed in the recession that has pounded business nationwide.

Most of their hard knocks provide them powerful lessons that can be a source of savvy to any business owner. After business owners learn hard lessons, their next business ventures may be different. To be sure, they'll still make mistakes, but maybe different mistakes, ones not fatal to their companies.

While revealing their hard-won wisdom, business owners whose businesses have failed or faltered reveal their pain; business failures hurt.

"The first year it was gone was awful," says Bonnie Altenhein, cofounder of Watch My Lips, a defunct Petaluma-based manufacturer of novel greeting cards. The cards looked like cute seed packages. "I went into therapy. I could not sort out why I felt so bad."

Eventually she identified the multiple punches that losing a business delivers to the owner. Watch My Lips, a corporation, had become like a person to Altenhein—a presence complete with personality. Losing the business was like losing a friend. She had to grieve the loss. In addition, after the business folded she spent much less time with her business partner—another separation. She also lost her self-created job and went through a kind of midlife crisis to find her next career. "All of that was really hard," Altenhein says. "I would go into my backyard and see all the unsold cards. It was really sad."

Before they founded the company in 1980, Altenhein and Jacqueline Stone, Altenhein's partner and a former sales representative, fended off skeptics among their family and friends. Nobody thought they could make it. They were advised to be sensible and get jobs. "Watch my lips," the partners said, and with start up capital of $32, they set out to prove everybody wrong.

Altenhein dreamed up ideas for the company's innovative greeting cards. Stone was a sales whiz; when Watch My Lips started, Stone popped unannounced into Bloomingdale's in New York and landed a $1,000 order for Bagel Seeds cards—which contained Cheerios destined to grow into bagels. The company enjoyed healthy growth in the early years, reaching gross annual sales of nearly $400,000 in six years, with 3,000 accounts and 75 sales representatives nationwide. At its peak, Watch My Lips had eight employees and many outside contractors who produced cards.

Altenhein and Stone paid themselves about $2,000 a month plus generous benefits and perks. One day on the way to a trade show they splurged, sailed into a dress shop, bought one dress each and charged the purchase to the company. "This was the most money I ever made in my life as a writer," Altenhein says.

Then the troubles began.

A flood ruined $10,000 worth of inventory.

Heavy rain on Valentines day caused a flood that ruined $10,000 worth of greeting card inventory in Watch My Lips' basement office in Petaluma. The two owners managed to salvage some of the cards, and they moved their office to another building, though they had a five-year lease. The landlord sued the company for trying to break the lease and demanded about $60,000—rent he expected during the remaining four years, plus legal fees.

Altenhein and Stone filed for bankruptcy and liquidated Watch My Lips. "We were scared to death," Altenhein recalls. Most of the company's creditors were paid off. One sales representative received a copy machine in lieu of money. Cartons of unsold cards sat in Altenhein's garage.

The flood and the lawsuit over the lease triggered Watch My Lips' demise, Altenhein says, but there was more going on. "Emotionally we were worn down by business pressures. The flood made it look like it was just not worth it." Watch My Lips soared, Altenhein says, in part because it was one of the first companies to produce alternative greeting cards, but the market had become crowded. Competitors jumped into the niche, producing cards that sing, have pop-up parts, play music and look like books.

In the last year of Watch My Lips' life, Stone had begun negotiating to sell the company to a large greeting card manufacturer in San Francisco. Complacency set in, Altenhein says. "We thought we were going to sell. A part of us cut loose and didn't work as hard as we should have. I was counting the money from the sale, but it didn't happen."

After losing her company, Altenhein went to work for a nonprofit organization as a fund-raiser. But she worked as a contractor. Once you have worked for yourself, she says, there's no going back to being an employee. In addition, she wrote greeting cards as a freelancer.

Altenhein thinks frequently about going back into business. "I still wake up in the night with ideas," she says. "It could get resurrected. I would do it in a heartbeat, in a second. But I'm scared to death. I never really had been adequately trained in business matters. Nobody told me about a profit-and-loss sheet. I'm missing basic accounting classes. I'm really creative and clever, but I'm not good at figuring out how many cents we could save on a print job. I don't want to know. I don't care."

Although Stone is a superb saleswoman, she also lacked business training. They needed a third partner, she says, who could attend to such crucial trivia as comparing prices of tape at various suppliers.

Some business owners think that incorporation will protect them from liability and make it easy to borrow money for a business. Stone and Altenhein incorporated Watch My Lips, but they had to sign personal guarantees before a bank would loan them money. Neither partner owned a house or any other collateral to secure the loan. Even though the company was grossing $400,000, the bank would only loan them $5,000.

It was a huge risk.

"It was a huge risk," says Altenhein of Watch My Lips. "You have to be able to live with the thought that one month you might have to pay three employees and not yourself. But it's still my biggest source of pride. All other things I have done have paled by comparison. I don't look at it as a failure. It's just a business that didn't work. We think of it as a success. We got into financial trouble, but there was nothing wrong with the cards."

Propped above a bulletin board in Altenhein's kitchen like a symbol that the business was down but not dead was a copy of Watch My Lips' second-best-selling card—a package of Prince Seeds. With just a kiss, three tiny green plastic frogs promised to turn magically into prime specimens of "homo georgeoso," and everyone would live happily ever after.

Altenhein isn't alone; the dream of owning a thriving small business lives on for many entrepreneurs whose ventures have temporarily soured in the recession. Most of them promise to bounce back and give birth to a new dream.

—James Dunn