Blog - On the Front Lines with Entrepreneurs

The On the Front Lines Series is the true life, inside stories of entrepreneurs making it work. 

In May 2009 we visited with Mariann Smith, Founder Just Bubbly, a self described “small” “artisan” soap business with revenues around $200k.  She was very helpful in sharing her experience of the retail environment and had just had an order for 7k pieces from Bath & Body Works.  Now, in August 2009 we reconnected and here is the update.  She just got back from the Philadelphia Gift Show and shared her observation and insight.

Mariann had her best July Philadelphia Gift Show in 5 years and here is what she noticed:

• Retailers are placing larger orders for immediate shipment. Mariann’s theory is that many had let their shelves go bare out of fear of the economy and they need to restock fast. 
• Opposed to what normally happens, retailers are reluctant to place orders for Halloween, Christmas or in the future, they will wait until closer to the dates and again want immediate delivery. Mariann’s theory is that they don’t want to be over confident.
• Selling best are still primary colors and feel  good items, at a low price point. Click here to see her Philadelphia Gift Show display and become a Facebook Fan >

As the Philadelphia Gift Show is in the footprint of New York, she is looking forward and optimistic about the big daddy New York Gift Show which starts Sunday, August 16th.  We’ll check in with her after the show!  

Click here to read Mariann's May 2009 article >

In the past few months I have moderated, participated and attended panels around New York City hearing views from both venture capitalists (VCs) and entrepreneurs about the current state of the financial and capital markets.  I have also been hearing stories and snippets from the 10% of venture backed companies and/or those are seeking financing within the Collective-E membership base.  To get a more in depth picture I approached Collective-E member Julie Brown, Founder and CEO of Inner Rewards, who was more than generous and forthcoming about the challenges and obstacles of raising money in the "great recession."  Her story literally had me sitting on the edge of my seat, not knowing from one day to the next if she was going to survive.  I think her story is playing out in startups around the country and she is a lucky one, she is still surviving. 

Here is the story with a chronological timeline in Julie’s words:

September-March 2007—While still working at Johnson & Johnson I started writing my business plan using Guy Kawasaki’s book, The Art of the Start where he lays out the needs one must address to investors. 

June 2008—With a 40 page business plan, Power Point presentation and executive summary I was introduced by two people to a VC/Angel Investor who is a limited partner at Sequoia Capital.  Back in the day (a year ago) this happened a lot, on the word of a couple connections, two meetings and with little due diligence, the investor jumped in as an investor with a first round of $765k.  It just so happened that he was looking for a consumer internet play targeting women that was not solely advertising based.  Inner Rewards is just that, with a business subscription and transaction model, like an eBay, Yelp, and iVillage, we provide content, reviews and deals related around health and wellness.

While many angel investors are more informal, they just want to give you convertible debt money, but because my investor is a VC  we priced the company and went for a full Series A round. He also wanted us to build the company up so it would be fully backed including an executive team and board.

July 2008—I set out to hire a team and get started with an aggressive goal of building and launching a beta site by the end of the year.  Because my investor wanted to build a company ready to be fully backed, and given an aggressive timeline to build a full blown site with content and videos, we ended up with  a very high monthly burn rate (monthly expenses).  I immediately set out to raise more money.

September 15th, 2008—Lehman collapses and the market is in turmoil, every single investor runs for the hills.  I have now built up a full staff with 7 employees and 40 contractors and need to raise cash quickly or we will run out of money before I can even launch.

October 2008—I am now fundraising 30 hours per week while building the company. I continue developing the pitch and am going to every networking lunch and dinner I can find in Silicon Valley and New York.  I am on the phone at least once per day with a potential investor. I find that investors are pulling back on new investments and choosing to invest in their current companies to keep them alive.  In fact, investors start killing companies in their portfolio so they can focus their resources, meaning they would actually pull funding and put their money into just a few select companies.

I eventually do get some more investors to come in, but now each investor takes an average of 8 conversations at 90 minutes each, and for every single person that came in many I talked to didn’t choose to invest.  They kept saying that it had nothing to do with their not believing in the company, but they simply didn’t have money.  I realized I couldn't take this personally or get over emotional.  I went to my original investor and asked for his help and his help was critical.  He is very connected and I found that when he made a connection they usually invested after one call.  For example, he went to a Goldman Sachs conference, met some guys from Citi and after one call they invested.

November 2008—In November, worried about raising even more money in tough economic conditions, I started to cut everything I could from salaries to rent (we moved 3 times) and contractors.   I couldn’t lay off my core team because there would be no possible way to launch, so employees agreed to work for less and we cut payroll by 30%.  I terminated 25 contractors including marketing people, writers, engineers and sales people.  I was forced to make major decisions on a daily basis that affected people’s lives, that was challenging.

December 2008—In a miracle feat, we launched our beta site, albeit a very trimmed down version, but it was launched.

January 2009-- In January, the economy actually got even worse.  We launched, which was great, but  investors started calling immediately expecting results.  Expectations were high and they wanted traffic immediately.  Everyone was getting very nervous, investors were scared and they started to pull out.  I continued to focus on raising money and my job for at least half of the timewas focused on raising money and the other half was spent appeasing current investors, I didn’t have time to actually run the company.   I also needed to keep employees happy and feeling secure, and when I wasn’t there they got nervous and I started to worry that key employees would jump ship.

In late January, my original angel who had 10 portfolio companies was starting to kill them (pulling the plug).  I had no idea if he was going to pull our funding.  During this time one of the worst things that happened was that we lost a big angel who was going to come in for 500k, but he backed out last minute.  After doing a complete dog and pony show, having him spend significant time in the office meeting the team and evaluating everything, he shook my hand, promised the money and then called two days later and backed out.  This scared our original investor and he stopped funding. It  made him think maybe there was something he didn’t know about or a reason not to invest. 

These were my darkest days and very difficult to muster my own motivation, I knew in my heart that we needed 6 months to a year in cash to survive, and I didn’t think we were going to get it; we just didn’t have the metrics to launch in a recession.  I feared that we would never really get the chance to thrive.   I realized that we were going to run out of money at the end of February so I had a friend come which gave us 1.5 months more in cash, which was a luxury at the time, but was still a very difficult decision for me and one that in some ways I regret; it affected our friendship.

February 2009—I finally decided I needed to take more control of the situation, as a first time CEO you are really learning on the job, and I feel at this time I really started doing the job of CEO. When you are in the middle of it, working 80 hours per week, not sleeping, eating or working out, you sometimes don’t see what is really going on.   I realized I hadn’t been thinking properly about how to get out of a hole and that I needed to see the big picture and get original investor resold,  my strategy was to make the original investor less scared. It  was tough but I wowed him over with everything we had accomplished.  For example, we had come in under budget, launched on time and accomplished every single thing we said we would do.  I convinced him that it was still a phenomenal idea and he didn’t want his money wasted.  I also set realistic expectations explaining that it wasn't going to happen overnight.  Finally, guess what?  I won him back over, he committed to fully funding the company until we could raise another round! 

June 2009— We are now on a run rate of 140k uniques, have over 500k page views and providers paying a monthly rate, but I still feel like we are not close to being out of the woods.   As a result, we are still being super frugal by keeping our payroll deductions and expenses low, negotiating everything we can and offering contractors equity instead of cash.  I now have more time to focus on the business and spend one to two days per week on fundraising.   Our goal now is to build out more of the site features and get the word out to spas and wellness providers, we have traffic but we don’t have enough inventory (massages, spa days, Pilates classes) to sell.

Lessons learned
•    Use your investors and find people who are trusted in the community.  Unless you have done this before, you do not know the right people.
•    Investors will give you money when there is no risk, the more desperate you are, the less chance to get money. 
•    Listen to yourself.  Our original Investor wanted breadth not depth, the problem became that we launched the site and there wasn’t a lot in January to sustain in coming back.  Because your investor will be insisting that you show how they made money, we showed deal section before we had enough deals.  In hindsight I should have started with an amazing community and once community ramped up, then made it broader.  In September, the site should be where we want it to be.  Note: If you are a spa or wellness provider, we need your deals!  Learn more>

Final Thoughts
While it is a great time to start a business, I now realize that we launched into the worst conditions in which to fund a new business.  Before the "Great Recession” you could get an idea funded, but now, that is virtually impossible.  Now you have to have the product, the metrics and a lot of great connections.  There is no way we could start out today and get funding, so we are actually one of the lucky ones.  While many times I wished that had done a smaller, self funded, home grown kind of company, our market size ($255 Billion for Spa Industry alone) determined that we needed to be big, so I have no regrets.  We are still crawling around in diapers, but growing up quickly and look forward to playing with the big boys.

Does this experience ring true to you?  Please tell us your strories of financing your business in "this economy," we can't wait to hear!

Is the wedding industry really recession proof?  To find out if that old adage is true, that people keep getting married during recessions and therefore the industry is impacted less by the economy, we went straight to Julie Goldman, founder of The Original Runner Company.

The Original Runner Company created the first non-slip fabric aisle runners and traditionally 80% of their business has been weddings.   According to Julie, the adage is not true, and virtually everyone in the wedding industry, from catering compaies to planners, venues, flowers, accessories and wedding dress desginers, is being affected.   Yes people are still getting married, but they are cutting back and having smaller affairs, for instance they might reduce their wedding list from 200 to 75, elope or throw a small backyard reception after their church wedding. 

After growing 20% year over year for the past 7 years and seeing revenues of close to 900k in 2008, 2009 was supposed to be The Original Runner Comopany's  first million dollar year.  Now, Julie, like many others in the industry is ‘going for even’ and will be thrilled to come in flat.  “Everything is being hit, and it seems that planners are the first to get cut as people are taking on the planning themselves, but anything perceived as more of a luxury such as custom favors, accessories or jewelry are especially suffering.”  She went on to explain, “If you think about it, if people are cutting down the size of their wedding, this impacts catering, flowers, even the size of the cake - virtually every single element of the wedding.”

Not giving up or getting down, Julie has been employing several strategies that are helping her get through:

--Revamped marketing plan to position more as a necessity than luxury.  “I am asking people to re-budget by saving floral budget for reception and purchasing a runner for the wedding, at $500, a runner is less than 10% of a typical flower budget."

--Investing in infrastructure.  "In 2008 I built and launched a new and improved website which is helping us stand out in the crowd and with sales."

--Running Sales.  “I ran more sales than ever before, especially during the slow winter months.”

--Saving money. “This has made me realize that I wasn’t running my business efficiently.  People left in November and I didn’t replace right away, I didn’t run out and hire new people like usual.  I put on a spending freeze and have been diligently cutting costs and putting away money in a slush fund.  In the end, I will end up a better run business because of this experience.”

All in all, Julie reports that things have been picking up.  Orders are coming in, albeit much closer to the wedding (usually would see orders 8 weeks out, but now one month out).  Julie sounds cautiously optimistic that the worst is behind and that people are ready to start spending. 

Julie, we are hopeful too and thank you for sharing your valuable insights and innovative strategies!