12 ms·

Failed Startup's Final Income Statements Reveal Grave Error

• msandford 13y ago
  If all that's true, it's simply breathtaking.
• loganfrederick 13y ago
  It boggles the mind that the investors, or even employees, let the margins get that ugly. When you're discounting your products/sales by $750K a month and accepting that loss, how is no one else missing that? Even if you don't see the actual income statement, you'd have to realize that you're selling all of your inventory at a discount. Not just some loss-leaders, but everything. How did no one call that out earlier? The whole Ecomom story is tragic, and the lost life is the worst part of the whole story. Yet, I can't help but think that if someone else had been more forcefully stood up to Mr. Sherman's business model, the situation could have improved before it turned tragic.
  • VLM 13y ago
    I had to LOL at the line from the post mortem: "No Balance Sheet or Statement of Cash flows had ever been prepared" I've not been involved in the finance side of a startup, can you really raise millions without any documentation at all? I mean, yeah, we all heard about the dotcom boom but that's all in the past, right? Or is it?
    • at-fates-hands 13y ago
      I had the same reaction. I've been on both sides of the start-up game. I worked at some and I've also invested in some. The first thing, without exception, investors want to see is a fairly comprehensive business plan. I'm still wondering how this guy received millions of dollars with such a flawed business plan. Either the BP was completely bogus and he managed to hoodwink a lot of people for a few years, or several people just completely missed the boat. Either way, it's jaw dropping what happened.
      • drumdance 13y ago
        Makes me wonder if he was showing rosier financials to investors. It's one thing to fail. It's another to commit fraud. That may have been on his mind when we was contemplating suicide.
        • davidandgoliath 13y ago
          I wouldn't recommend venturing that far out into left field -- just the premise of having to lay off half (or more) of your team to stay afloat (In addition, a team you've worked with since the start) would be disheartening & depressing enough to drive even the most capable leaders into a corner. Toss the bad publicity into the mix while you're simultaneously trying to raise more funding and you've got a dark corner.
          • drumdance 13y ago
            Yeah, I shouldn't cast aspersions without evidence. But it's the only reason I can think investors would throw money at such a business. Someone should interview them, because clearly some bad decisions were made all around, not just by the founder.
          • trotsky 13y ago
            I'm sure that's why half the people involved, including the external auditor are only speaking on the matter through their attorneys.
      • ams6110 13y ago
        There's a tiny book, On Bullshit, by Harry G. Frankfurt, in which he describes the bullshitter as a person who will say whatever is necessary to achieve what it is he wants to achieve. It's not really an issue of truth vs. lie... the veracity of his statements just doesn't matter to him one way or the other. I'm guessing that Jody was just very adept at divining and telling investors exactly what they wanted to hear, at least in the early going.
    • rdouble 13y ago
      can you really raise millions without any documentation at all? Yes, of course. Do you think Instagram had a "balance sheet" when they went to raise money? Replace Instagram with any other popular startup.
      • VLM 13y ago
        I think the key is at least from an enduser perspective instagram was a startup doing something "new". So there's first mover advantage, etc. This is a different scenario, "we're just like amazon/walmart/wholefoods but greenwashed marketing and they have first mover advantage". Even greenwash marketing isn't a new idea. Its more like competing in the restaurant arena or maybe brick n mortar retail than real "startup".
        • rdouble 13y ago
          It seems like in 2010 it would have been easy to get funding for an e-commerce site because investors all wanted a zappos, rue-la-la, net-a-porter, gilt, etc in their portfolio.
      • eli 13y ago
        I assume they did even if it didn't have very impressive numbers. Surely they had a document that tracked balances and cash flows, no?
      • tomphoolery 13y ago
        Why would they have a balance sheet if they don't/didn't make money?
        • jaggederest 13y ago
          Balance sheet isn't about making money. It's about assets, liabilities, and equity. Everyone should have and understand a balance sheet for their personal finances. You should know that your house is an asset, and the mortgage against it a liability.
        • doktrin 13y ago
    • 6cxs2hd6 13y ago
      Very early on, someone experienced told me they always start with the Cash Flow statement. Of the statements, that's the least-bullshit one of the three. Look at Cash Flow, and look at the "Current" subtotals of the Balance Sheet. Look at these longer and more carefully than the P&L. Technically you should understand how all three fit together; each alone could be misleading in its own way. But for many businesses the cash perspective is the closest to reality. If you only have time to understand one, deeply, that's the one. I suspect most people look mostly at the P&L a.k.a. Income Statement. But that uses a lot of constructs (like "accruing" things over time) in a well-intentioned effort to tell a more-accurate story about the business. The problem is if you treat it as "hard numbers". Actually it's just one story about the business, a useful fiction with some truthiness value.
      • hga 13y ago
        Bingo. Whether you're alive next week, or perhaps asking your employees to work for free while you close the next round of investment, depends entirely on cash flow. Cash flow tells the real story of what's happening and whether its a viable (well, at the time) business. Other measurements are important, but as you note can be fudged. Even fudged in good will. Think about the AOL example; from memory, the cost of customer acquisition was defensibly amortized over the expected subscription period (how long they stayed a customer). If that period is overestimated....
      • ghaff 13y ago
        Small businesses are (almost) all about cash flow. As a company grows, the income statement and balance sheet becomes more important--especially if one or more aspects of the business model cause a big difference between when money comes in or out and when it is recognized under GAAP.
    • nostromo 13y ago
      These snafus compared to the dot com bubble are orders of magnitude smaller. I remember when PayPal gave $10 to you just for signing up. (People of course signed up many times and got many bonuses. People howled about how they would never build a business if they had to buy customers.) I remember when Yahoo bought the domain Broadcast.com (and a few assets, but not really) for billions (with a b!) of dollars. I remember when Pets.com spent $10 million on advertising to get $500k in sales (not even net, sales). I remember when Amazon.com paid workers in a Seattle high rise to call mom-and-pop book stores in search of a $8 out of print book that had been ordered on the website. Etc., etc., etc. I understand the urge to yell "bubble!" when reading these stories -- but comparisons to the dot com era is to make a mountain out of a molehill.
      • jlarocco 13y ago
        It's something to keep in mind, though. You gave some of the bigger examples, but I'd bet there were a lot of smaller failures in there, too.
      • dllthomas 13y ago
        > I remember when Amazon.com paid workers in a Seattle high rise to call mom-and-pop book stores in search of a $8 out of print book that had been ordered on the website. I don't think that one is absurd. Sure, if their business model involves significant selling of cheap out-of-print books, that's not going to fly, but it's my understanding (would be thrilled if any industry insiders reaffirmed or corrected) that overwhelming majority of book sales aren't out-of-print books, and knowing Amazon'll do that kind of thing was good advertising. Like a loss-leader.
        • wpietri 13y ago
          Yes. This is like saying Toyota is dumb because they were selling the early Priuses below cost. Smart companies are willing to invest heavily in new products, and base their pricing on long-term costs, not short-term costs. Giving no thought to margins is one way to kill a startup. But paying too much attention margins is another way. Amazon has been particularly smart about this. E.g., the Amazon Prime program. From what I've read, it more or less breaks even. They surely lose money on some people over some periods. But now that they've captured 90% of my on-line purchases, they can start squeezing out the costs. E.g., their move to set up local distribution centers and same-day delivery. Cheaper for them than using FexEx, and better for me. And utterly impossible for people too focused on per-sale profits to compete with.
• unreal37 13y ago
  This is tough: * Revenue $1.0MM * Variable costs $1.5MM * Fixed costs & admin $300K * For a net loss of $800K How can your variable costs exceed your revenue by so much? You might as well not be in business.
  • rdouble 13y ago
    This is what e-commerce balance sheets look like, though. Someone must not have told him that anything related to online (or offline) retail loses money for at least 3 years, making any money at all after 5 years is considered amazing, and Amazon.com lost money for 12 years before it made any. The main personal attribute you need as an e-commerce executive is a strong stomach.
    • rollo_tommasi 13y ago
      But surely most e-commerce websites can't have a net negative margin for three years?
      • RyanZAG 13y ago
        The smaller ones piggybacking off of Ebay and similar generally turn a (small) profit immediately. However, the large ones with innovative storefronts and the Google-like classy looking top notch websites are always making massive losses, often for many years at a time. The reason for this is that investors hope that the wave of people moving their lives/shopping online will turn these big players into the next Walmart - which is almost exactly what is happening with Amazon now. So the strategy is not a terrible one, just a risky one.
        • fyi80 13y ago
          Losses != negative margin. Amazon was not profitable for 10 years, because revenue did not exceed variable+fixed costs. But revenue exceeded variable costs. They had losses for 10 years, but had positive margine.
    • socalnate1 13y ago
• conanbatt 13y ago
  How did the "outside accountant" miss this :S.
  • jarito 13y ago
    He didn't. That's why he is refusing to talk through lawyers.
  • kevinpet 13y ago
    The accountant's job is to tell you how it is, not persuade you to fix it.
• deleted 13y ago
  [deleted]
• rdl 13y ago
  Where the fuck was the board? It looks like he did a "party round" with tiny investments from a lot of sophisticated investors, combined with bigger investments from less sophisticated investors, and none of them were competent and interested enough to exercise any oversight. http://www.crunchbase.com/company/ecomom http://www.crunchbase.com/company/ecomom
  • rocky1138 13y ago
    Was there a board? From what I can tell it looks privately held with one majority shareholder.
    • rdl 13y ago
      Per the great state of Nevada: Jody Sherman ("February Won, Inc") (this is ecomom) Zem Joaquin ("February Won, Inc") Alan R. Greene, M.D. FAAP (CareDox, Inc) Robert Beck BS, MS (EcoMom, Inc.) John Daniele Hamel (The Cue Ball Group, LLC) The only one I'd consider credible is Dr. Greene, and in general doctors are exceptionally shitty businesspeople. Cueball is a small/unknown VC in Boston.
      • droopyEyelids 13y ago
        How did you get your hands on this?
        • ims 13y ago
          Not to speak for the GP but in addition to the Delaware Division of Corporations[1] in which February Won, Inc -- like many startups -- was registered (and where you have to pay a fee), there are quite a few public sites which attempt to aggregate this information, albeit with varying levels of accuracy. For instance, Bloomberg Businessweek [2]. [1] https://delecorp.delaware.gov/tin/GINameSearch.jsp https://delecorp.delaware.gov/tin/GINameSearch.jsp [2] http://investing.businessweek.com/research/stocks/private/people.asp?privcapId=98789527 http://investing.businessweek.com/research/stocks/private/pe...
        • 13y ago
• unclebucknasty 13y ago
  I think it's an oversimplification to say that Mr. Sherman "did not understand margin". The concept is so fundamental that you can explain it to first-graders as soon as they're introduced to a number line. Sure, he understood it. Did he respect it as the prime directive? It seems not. But, plenty of companies would take the same approach and write down the losses to the cost of customer acquisition--pure marketing--with the idea being to recoup later. That drive, BTW, is a side effect of high-pressure SV culture. Rather than build more methodically with an emphasis on creating rabidly loyal fans who are willing to pay a higher price for service, customer experience, etc, the goal was to grow revenue and customer base as quickly as possible by any means. In this case, it meant deep discounting. So, instead of a simple misunderstanding of margin, the problem here seems to be more that this pressure caused him to embark on a strategy ill-suited to his product. Once he'd trained his customers to expect discounts so deep that he couldn't possibly profit, there was no turning back. It seems, instead, that the Zappos model would have been more suited to his offering. But the relentless pressure for growth combined with the belief that he had access to more capital seems most responsible for his approach. I think it's possible that many rational people would have been lulled into making the same mistake, even with a clear understanding of margin. To say that he didn't understand that you have to sell a product for more than it costs to profit is nearly insulting.
  • apalmer 13y ago
    No. You are stating your opinion based on disregarding the facts at hand because they don't align with your worldview, this is exactly how an intelligent person can end up not understanding something basic. The individual who actually went over the financials in detail, and who actually knew Sherman, and who actually spoke to Sherman about the financial situation at the time is putting his reputation on the statement that Sherman did not understand margin. He might be right, or he may be wrong, but he has a lot more backing to his opinion than you do.
    • unclebucknasty 13y ago
      Yes, I am stating my opinion, as are you. Odd that you charge me with speaking out of turn while yourself presuming to understand my "worldview" and the thought process that led me to my conclusions. You're in my head now? >He has a lot more backing to his opinion than you do. And, I know my own "worldview" better than you do. Or would you like to explain my worldview to me? As well, I know better than you how I arrived at my own conclusion. It's simple common sense. What adult doesn't understand that a company profits by earning more than it spends? I could be right or I could be wrong, but I will go with the rational conclusion.
• auctiontheory 13y ago
  Among other things, the "revenue" number seems totally bogus. Reminds me of a tactic used by Skillshare. I sent them some feedback saying the class I'd just taken was terrible. They didn't offer me a refund (I hadn't asked for one), but they did give me a "scholarship" for the course amount - $20 back to PayPal, operationally identical to a refund. This way, they get to book "my" $20 as "revenue," and the "scholarship" as a "marketing expense."
  • davidandgoliath 13y ago
    Quite interesting! Hadn't ever seen that but it's rather wise from an accounting standpoint.
    • littlegiantcap 13y ago
      Wise from the perspective of attracting investors? Maybe. Wise from the perspective of running a functional business? No. Fudging metrics to make yourself feel better is crazy. How are you expected to know the actual health of your business without having a clear view of metrics as simple as revenue, marketing, and returns.
  • deleted 13y ago
    [deleted]
• richardjordan 13y ago
  This is all a very sad state of affairs obviously. I think, though, cautionary tales do have some value - and hopefully allow a small silver lining to the accompanying cloud. In this is, as the post outlines, an important lesson to founders from the sales/marketing side to not oversell yourself, not just to others but to yourself. This is part of the reason many VCs are reluctant to back companies founded by pure sales people, because such folks will oversell their own ideas to themselves and not look as critically. You MUST get to grips with fundamentals. You MUST understand the financial details of your business and not hand that responsibility off to someone else. I would also argue, though many disagree, that you MUST understand on some level of detail the engineering behind your product, even if you are not the level of coder your engineering team members hopefully are. Pitching ability is necessary but not sufficient qualification for success as a startup founder. It's a very sad situation when someone pitches so far ahead of the curve they feel like they have no way out. Depression and despair is a frighteningly common situation to find yourself in as a founder. Help yourself by owning knowledge of all aspects of your business and THEN let the subject matter experts own the deep dive and the execution on those.
• theflyingkiwi42 13y ago
  Reading the Ecomom story it reminds me of Zappos. That company too was losing a lot of money. It only sold to Amazon after their investors refused to put more money in. The Ecomom story is pretty mind boggling from a sound business perspective, but then so is Zappos. And look how celebrated Tony Hsieh is. And guess who was also an investor in Ecomom?
  • gokhan 13y ago
    I think Zappos' and Ecomom's stories are way different. Are you referring to the info in the Zappos' book, delivering Happiness?
    • theflyingkiwi42 13y ago
      Yes, I am. I am sure there are big differences (especially in the outcome) but both were losing money in the hope of building an audience, and to lower costs later. As Hsieh wrote: "Zappos sells shoes and apparel online, but what distinguished us from our competitors was that we'd put our company culture above all else. We'd bet that by being good to our employees -- for instance, by paying for 100 percent of health care premiums, spending heavily on personal development, and giving customer service reps more freedom than at a typical call center -- we would be able to offer better service than our competitors. Better service would translate into lots of repeat customers, which would mean low marketing expenses, long-term profits, and fast growth. Amazingly, it all seemed to be working. By 2005, gross merchandise sales were $370 million, and we made the Inc. 500. We weren't profitable yet, but we were close to breaking even, and our revenue was growing quickly." http://www.inc.com/magazine/20100601/why-i-sold-zappos.html http://www.inc.com/magazine/20100601/why-i-sold-zappos.html Seems pretty similar to me. The only difference is that Zappos went after a much larger market.
      • fyi80 13y ago
        Where is the part where Hsieh wrote that he sold each item at a marginal loss?
      • vessenes 13y ago
• dools 13y ago
  It seems that at the core of their demise was the fact that their discounting strategy was very Groupon-esque, ie. Done using a 3rd party service and ultimately failing to capture loyalty of their customers. The article states "when they stopped discounting, the sales stopped" but the way that reads to me is that the 3rd party discounting service was actually their only significant source of traffic. It seems unlikely that if they were offering goods at a reasonable price that people needed with a trustworthy level of support, that their sales would completely evaporate in the absence of discounts otherwise.
• Blockhead 13y ago
  Wait, are you telling me I'll LOSE money if I sell things below cost? That's not a "grave financial error", it's an egregious violation of common sense. He was basically running a Groupon for moms, and no one stopped to say "Hey, Groupon never turned a profit. What makes you think your company will?"
• arbuge 13y ago
  >> A large problem was Sherman did not understand some basic business principles. "I would bring the financial statements to Jody who would glance at them so cursorily and wave me away with 'no one can understand this without extensive analysis,' Prentiss writes. "Critically, he did not understand margin. At the end of December when things were getting truly desperate, he said to me, 'Phil, just bring me a forecast that shows how much we need to sell to break even.' He did not understand, after three years of negative margin, that increased sales resulted in increased losses. He had built his house by raising money and when times got tough he went with what he knew." If the above it's true, it's really scary. You should not be in any business, let alone commerce, if you don't get this basic stuff. Building a business is about making money - coaxing it right out of the unit economics - not raising money.
  • prawn 13y ago
    I doubt he didn't get it, he just wasn't interested and thought he could make it work just by watching sales. He wanted a target that made sense to him. Obviously a flawed approach in the field he was in, ultimately.
    • eldude 13y ago
      In other words, he didn't get it. You cannot say someone truly gets that something is in their best interest if they think it's best to continue to do the opposite.
      • ams6110 13y ago
        Exactly. If he really understood what negative margin meant, he would never have asked for "a forecast that shows how much we need to sell to break even."
        • prawn 13y ago
          OK, maybe I meant "Could've got it. Chose not to."
• jwheeler79 13y ago
  Can someone please help me understand what I'm missing? When I calculate the Net/Profit Loss on the first income statement I get ($521) and not ($548). I don't see anything in the article that accounts for the missing $27K. What kind of accounting is that?
• jacquesm 13y ago
  Two weeks ago I took a look at a company in distress. Three years of figures: 2010, profitable, 2011, still profitable but substantially lower, 2012, huge loss. Every year their turnover grew but their margins decreased (because they had to bid lower (more competitive) on contracts in order to grow their revenues). The CEO had no idea why they were in trouble, he'd attributed it to his co-director making off with money (which in fact he did, but only relatively small sums). They've filed for bankruptcy last week and to this day I'm not sure if I've been able to adequately explain to him that if you lose more money on every subsequent project that you contract that you can grow your revenues only until your cash reserves run out. Even with the figures laid out pretty clearly I think he still does not really get it. Puzzling. I think they thought that as long as they were winning the contracts from their competitors that they were doing well but if you don't accurately track your purchasing you will never know whether you are making money or losing money on a contract.
  • robryan 13y ago
    Yeah, in the optimistic financial planning they may be budgeting for a profit on every project? I always expect profits to be a fair bit lower than the back of the envelope estimates, so many little unaccounted for things come up.
    • jacquesm 13y ago
      Gross margins vs net margins was all it took to put close to a 100 people on the dole. In a cut-throat industry it takes pretty precise bookkeeping to know what you can bid on a contract, if you think you're making 10% when you're actually making -10% growing your business is the worst thing you could possibly do. First you'd need to fix your margins, and if that is not possible and some competitor still outbids you then you should simply let it go. Otherwise you'll end up winning all the battles but you will still lose the war.
  • eliajf 13y ago
    Great comment. I had a professor say often that "cash is king." Obviously these companies aren't paying attention to cash at all.
• milkshakes 13y ago
  "First and foremost,the VP of Sales was compensated according to sales before discounts, not according to margin or profit" what could possibly go wrong?
  • mratzloff 13y ago
    Oh my god. What clown couldn't get personally rich with that setup?
• feralchimp 13y ago
  "Grave error" implies something that a non-fool might blunder into. Fools don't blunder, per se, they simply exist. One of the first jokes I ever heard at a startup was "We'll give the product away and make it up on volume!" Changing the joke to "We'll pay people to take the product and make it up on volume!" doesn't make it less obviously ridiculous. I'm amazed they were able to hire employees, let alone find investors. Doesn't make the guy's death any less tragic though.
  • specialist 13y ago
    That's an oldie but a goodie. Saturday Night Live Clip (First CityWide Change Bank 2) http://www.imdb.com/video/hulu/vi416284697/ http://www.imdb.com/video/hulu/vi416284697/
  • fyi80 13y ago
    Before startups or the Internet existed, the old joke was "Lose a little on every sale and make it up in volume".
• fitandfunction 13y ago
  It's not just small companies. I worked briefly for a mid-sized tech company that took a >$70 mm round, but will likely be out-of-business before year end. Like Ecomom, it is helmed by a "visionary" / fanatical leader with a "grow at all cost mentality." To me, a big red flag is when senior managers make plans without both revenues AND costs being openly discussed.
• jwheeler79 13y ago
  Here's the best part from the full post mortem "First and foremost,the VP of Sales was compensated according to sales before discounts, not according to margin or profit. Our discount strategy resulted in enormous losses, but for the VP of sales the strategy optimized his bonus. " It's called incentive based behavior, and it goes to show you that if you reward someone for the amount of shit they can sell without any consideration for margin, they'll give the damn shit away for free!
• smartician 13y ago
  | "For example the customer would pay Plum District $20 and receive a $40 coupon to be used on our site. We would ship $40 of retail value and receive nothing from the customer, but eventually receive $20 (less some service charge) from Plum District." So it's basically Groupon for goods? For businesses with low variable costs (like restaurants and hotels) this might actually work, but for physical consumer goods with cut throat margins? Insane.
• unreal37 13y ago
  Seems like he was using a groupon like service to sell $40 coupons for $20, and then only getting part of that $20 back from the marketing company. Built in 66%+ loss on every sale. Those coupons have hurt many a business. People buy only $39.99 and not a penny more since the coupon anchors the price and the expectation.
• MattRogish 13y ago
  Holy mackerel, does this ring true! Long ago, I had an internship at a company that focused primarily on daily revenue. An email would go out in the morning with yesterday's sales figures. It omitted (for reasons I don't know) the gross margins. Someone high up figured out "Hey, we can goose the numbers by running sales!" and so the sales went up - almost daily - and yes, indeed, the daily revenue $ went up and up. I'm not sure what happened to the business, but I'm sure if you want to maximize daily revenue you can but if you don't pay attention to margin, well - you're in trouble. I thought this was an isolated case but clearly anyone can fall into that trap. Very weird, especially when the data is staring you in the face. Reality distortion field? Incompetence? Willful ignorance? Some of each?
  • jonnathanson 13y ago
    In medium to large companies, this trap typically emerges in situations where someone responsible for top-line revenue is not responsible for bottom-line revenue (i.e., sometimes in organizations where Sales has little contact with, or accountability to, the other departments). In startups and small companies, the problem has been exacerbated by a relatively recent obsession with growth uber alles. Growth, growth, growth, with little regard to whether growth is sustainable, or to how costs scale with revenue. Groupon is the ultimate lesson in the dangers of putting financial growth on a pedestal at the expense of all other considerations. The problem is also made worse whenever founders run a company solely expecting to exit with a strategic buyout. If you're not really running the company as a going concern, you have less incentive to work toward long-term sustainable margins. We tend to glorify the big exit, and there's certainly a lot of hard work and skill that goes into achieving one -- but the highest peaks on the mountain of glory belong to whose who develop and run lasting businesses. A professor in a business class in college used to put it this way, and I'll paraphrase: "If I want to start the world's fastest growing company, I can do that right now. It's not hard. I'll just start a business selling $100 bills for $90." The metaphor was purposefully simplistic, but it's amazing how people seem to fall into similar business models without even considering that they have.
    • unclebucknasty 13y ago
• photorized 13y ago
  Re: "Our discounts are meant to be one time only, but we can't limit them by customer so every order ends up sold 50% off" Sounds like a technology problem.
  • yekko 13y ago
    No it isn't. It's a business plan problem. Stop blaming the developers for everything :)
    • photorized 13y ago
      As a former dev myself, I've seen that problem quite often. :)
• yannisp 13y ago
  I hope no one forgets we often value companies (in an overly simplified way) by a multiple of their revenue. Of course other things are taken into consideration but had they kept their discount as a marketing expense they could have gotten away with it in going on to next steps like a potential IPO. What the article highlights is that the wrong variables were taken into account when calculating margin, and this could happen very easily/could be debated both ways. The thing I'm curious about is their balance sheet. If someone buys from a site like plum district a gift certificate for $40 that they paid $20 for, California residents are entitled to at least $20 of goods for an unlimited time... What a nightmare!
• yekko 13y ago
  School should teach critical thinking skills and I guess the concept of profit/loss...
• jsumrall 13y ago
  I don't get it. The guy was an idiot, and the people who funded Ecomom were blind. A high school student could have pointed out the flaws here.
• dennisgorelik 13y ago
  Investors must invest responsibly and don't give money to clueless entrepreneurs. These misguided investments pushed that clueless & reckless entrepreneur toward suicide. Irresponsible investing is similar to irresponsible lending during the housing bubble (pre-2008).
• atechnerd 13y ago
  I recommend reading the full letter from Prentiss as opposed to the summarized version on B-insider. The full-version presents a very clear cautionary tale about business strategy and management. Prentiss articulates himself well and gives you an inside look at what it's like to watch a start up fail.
• trotsky 13y ago
  I'm getting tired of seeing the never ending spin from one or another person that given that justice would be considering changes if it wasn't for the fact that jody swote the final chapter. I don't know phillip, and I'm sure he's a nice guy, but nobody that took an accounting class at community college has a lack of financial knowledge so great that they couldn't see two trains inexorably colliding, a process that began well before 4Q12 and in fact stretched back to prior to the last round of funding closing (late summer). A mere glance at the numbers showing 90% of the days orders a) via 50% pre-sale b) had significant coupon (often 30%) stacked on top of that that applied to the total not just their share, c) 99% got free shipping that they valued at $6 but likely ran twice that much of the time. When you add it all up you are losing money on every sale even if your product is free, you have no marketing costs, no fullfillment, no chargeback, no backoffice, no ceo's that need to bust it at yet another conference. It was so bad that you could easily within seconds spot the real transactions - people paying ~70%-~%80 of list and shipping. because you;d only see one once a day if you were lucky. There's a phrase accountants use when they really wan to to say a certain word but it gets you sued if you do. So here we go. There was an obvious material weakness present in absolutely everyone conducting the business of the board and the c level posts. As much as nerds want to believe that crap about how dumb the population is, people aren't that dumb. Make no mistake, there was something completely unmistakable for incompetence at the very best at work here. Sure they wasted a bunch buying customers, but thats not how you go from $5+1secured in a few months. This money walked out the door. Where'd it go? Well it turns out that post crisis the lead investor and secondary spot of the board poured over books day in day out withe the brand new "fall guy" president, elected by the board two days after jodys death. They amounted to the entirety of the forensic accounting done and found that no money was missing though employees never saw the books. Then, 28 days after his death they transferred all shares and assets without prior announcement to in effect liquidate without the oversight of the court. The key part there is oversight - a court appointed trustee would have the obligation to claw back money, especially from insiders. The Instead in this case the insiders paid a significant amount of their cash on hand (six figures) as they wrapped up to provide sherwood partners a hefty cash guarantee on their liquidation expenses, and likely covered some of their secured debt as well to buy the ascent of the major secured creditor. While that happened in secret they continued to ensure contractors that'd be paid and enough was there. Now that's 0 for the benefit of bankers. For no more than 100-200 gained off of misclassified 1099s. That substantial fraud occurred goes essentially unquestioned in those circles. That the active member of the board from cue ball was at least guilty of gross negligence seems difficult to argue against. And yet nobody in the whole process is willing to stand up, investors, employees, the many parties only speaking through lawyers, about it because of the code of silence in vc-istan. Which is absolutely real and will absolutely fuck you. If you're doing venture backed lottery schemes for a living you should make sure find some of the contrarian stories and listen - when things don't work out the windowns are far from having free snacks.
• olalonde 13y ago
  I assume "Magneto" is in fact "Magento".
• james1071 13y ago
  The reality is that small online retailers have no chance against amazon unless they sell at a loss. The delusion is to think that the losses are an investment.
• ErikAugust 13y ago
  Multiply by a negative number - and guess what? You get a bigger negative number.
• lhnz 13y ago
  Prentiss also says Sherman drew up a will one week before he died and gave it to his secretary. And they didn't consider this a massive red flag?
• lectrick 13y ago
  So the "grave error" is a lack of simple understanding of what a margin is? Seriously?