5 ms·

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 accep

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.

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.