2016, Chapter 2: What To Do While Waiting for Ragnarok
(or, Alternate Strategies for Creating Your Own Well-Capitalized Company)
One of the things I’m asked the most is, “How the hell do I start a company like Schiit, if I’m not able to put a whole bunch of money into it?”
This question is usually accompanied by a pained, bewildered expression—a pure distillation of all the obstacles, slights, screw-ups, and stacked decks that keep everyone from simply telling their boss to get a bag of sand and a little hammer, they ain’t comin in the next day, or anymore at all.
And I understand that expression. That was me at 19, still in college but dreaming about starting a multi-million dollar speaker company while making cabinets in my parents’ living room. That was me at 23, out of college and immensely broke, plowing every paycheck into Odeon, the failing speaker company that was having trouble breaking into 6 figures in sales, let alone 9. That was me at 26, speaker company dead, when I was working for Mike doing Cobalt, and smugly sworn off ever trying to start another company. And that was me at 28, thrown out of the warm embrace of Theta and Sumo into the harsh reality of having to get a job, or start another company, or
something…anything…to keep from being broke in very short order.
And, when I was honest with myself, it came down to this: I always wanted to have a company like Schiit…but the investment necessary, and the obstacles involved, simply seemed too large.
And yes, sure, you can read rah-rah stories about entrepreneurs who found venture capital or angel funding or whatever, but the reality was that I didn’t have the network or the connections to even start thinking about that. The pre-Centric days were also the pre-internet days, and the chance of convincing a VC to put a ton of money into an audio venture (low return) helmed by a very young (and even younger-looking) kid with one dead company under his belt was, well, notgonnahappen.com. It took another half-decade or so before they started throwing stupid money at web development firms headed by twentysomethings.
All of this is a long-winded way of answering the above question in the shortest and most brutal way:
“Many times you can’t.”
But What Can You Do?
In the negative above, note the positive outcome. At 28, I wasn’t able to start a company like Schiit with my own money, nor was I able to find capital to make it happen…
but I did start a company.
And that’s something to keep in mind. It’s important to think about what kind of company it was, too. But I’m getting ahead of myself.
First, let’s tear down a bunch of the stupid crap you may have heard about starting a company:
- You can get money from investors. Ahhahahhahaahahaa! No. Unless you have an in with a VC, plus an experienced board, a roster of impressive advisors, and you hit the exact right time with the exact right concept that’s the hotness du jour, no. Forget it. Put it away. Do not pass go, do not collect $200MM.
- You can get money from banks and creditors. Not really. Not in the sense of them bankrolling a pure start-up from an average person without a trust fund or demonstrated cash flow. Once you’re running, they can provide enough rope to hang yourself with…er, I mean, things like receivables financing and other financial equivalents of push-up bras. Enter at your own risk, and beware of addiction.
- You can get money from credit cards and such. Partially true, but how many cards can you really get, and at what limits? What interest rates? Yes, this can happen, but it can be a very deep hole, and one that is very difficult to climb out of. I financed some of the fast-growth part of Centric on credit cards, and it took many years to dig out from it.
- You can get money from crowdfunding. Ah, yes, the panacea of the twenty-tens. Now not smelling so good. Some high-profile failures and endless delays will do that. Also, with the crowdfunding environment more competitive than ever, expect to drop some fairly serious money producing the marketing for it—and promoting it. And remember, that money comes with gotchas—big gotchas in the form of thousands of backers, all baying for their product, right now.
And also let’s review some of the true stuff:
- It’s not for everyone. Running a company means there’s no place to hide. You can’t say, “Well, that’s the strategic directive for our division,” or “I told Bob to take care of it, I don’t know why it’s not done,” or even “Joe, can you copy these things for me?” Everything rolls uphill to you. Not comfortable making decisions? Not good at handling stress? Maybe having your own company isn’t the best idea.
- It’s difficult. Yes, it is. Not only are there tons of complexities and gotchas in whatever your company does, there’s also the miasma of “stuff” that surrounds a firm. Business regulations. State and federal statutes. Quarterly taxes. Payroll and HR stuff, when you get there. Accounts payable. Bookkeeping. The list is very, very long. Are you ready for that?
- It can eat your life. Want to spend endless time on the beach, enjoying every day as your children grow up at your side? Weeeellllll…that probably isn’t gonna work, at least not during the start-up phase. And that “start-up phase” can easily stretch from 2 years, to 5, to a decade. It was a full 10 years after I left college, and 4 years after I started Centric, before I took my first one-week vacation.
“Okay, fine,” you’re saying. “I get it. And I’m cool with all that. And I still don’t see how you start something like Schiit without being made of money.”
Well, in actuality, Schiit didn’t consume that much cash at all. As I noted in an early chapter, Schiit started, all-in, at about $10,000. The first run paid for the second runs, which paid for the next, and so-on. And it has continued to this day, entirely self-funded, with zero bank loans, zero investment, and zero crowdfunding.
The sting? No salaries for 2 years. Yes, we paid Eddie and Tony, but for Mike and I, nothing.
Which brings me to the first “thing to do while waiting for Ragnarok:”
Trade time for money.
But let’s go into more detail about that (and other) strategies.
Strategy the First: Trade Time for Money
Yep. You can do exactly what we did. Invest lots of time, not money. It works like this:
- Identify a compelling product you can feasibly build with a small investment. For us, this was Asgard. Yes, we announced both Asgard and Valhalla when we started, but it was vapor. Well, almost. We had a working board.
- Determine if there really seems to be a demand for this product. Yes, I know, this is the most hang-your-butt-out part of it. I had cold sweats about whether or not the Asgard would actually go…but based on the market at the time, it certainly seemed like it would.
- Make sure you can talk to people who might buy the product without going broke on marketing. If the plan involves huge advertising investment, that’s big money—which negates the advantage of trading time for money.
- Build the product. Note this isn’t a slam-dunk. But without a product, you don’t have a business—at least not in this scenario. See below.
- Sell it. It has to sell.
- Reinvest the money to make more. More of the first product, or additional products.
- Repeat 4-7 until you can pay yourself. Note that you may be hiring people—no, wait, you almost certainly will be hiring people—before you pay yourself. Don’t get a chip. Don’t huff and pout. This is the way it works. The people who work for you benefit first. If you can’t defer satisfaction, you probably shouldn’t get into business.
- Repeat 8 until you’re bored. Then sell the company and go play golf or make spaceships or something. Or not. You know what I mean. I hope.
Pitfalls of this approach? Sure, there are plenty.
First and foremost, I’m sure you may be thinking, “I can’t go two years without a salary, no way, no how.”
But how true is this?
What if you started the company in your spare time, while you maintained your regular job? That’s what I did when I started Schiit. I stayed at Centric while Schiit was ramping up.
Yes, I know, that’s a ton of time. During the Centric/Schiit start-up phase, I was easily working 80 hours a week. Work eats your life. You won’t see your kids. That’s a pitfall—but it’s also an inherent part of trading time for money. How bad do you want it? That’ll always be a key question, no matter how you end up going about starting your own business.
Other pitfalls include:
1.Your first product doesn’t take off at all.
At that point, the whole scheme collapses. This is what happened with Odeon loudspeakers. Our speakers didn’t take off. So we spent years tweaking the line, coming up with more exotic designs, and trying to figure out ways to get it to run. But it didn’t. Chalk this up to a product that probably didn’t sound as good as it should, looked strange, and didn’t have the advertising support that the dealer base needed in order to take us seriously. Remember, direct sale wasn’t an option back then.
So what do you do if your first product doesn’t take off? Remember my joke about having “Christmas presents until the end of time” if Asgard didn’t sell? Well, that’s one option.
Another is to come up with another product and try again. It really depends on your appetite for iteration, your budget, and your stamina.
But make no mistake: success from the start isn’t a given. Be realistic. Have a Plan B. And know when to cut your losses.
2.The product doesn’t take off as fast as you hoped.
This is bad, too…but maybe not as bad as you think. I’d intended Schiit to be a “hobby business,” something that we could run out of the garage, or out of a 400 square foot shed in the backyard, or something like that. If Schiit had been slow-growth, that’s where it probably would have ended up.
The problem, of course, is that with a slow-growth business, you’re going to be a lot harder-pressed to start hiring the people you need to get you working sane hours. So you may end up looking at many, many years of having a main job and a hobby business…never seeing your wife or kids…working 16/7 and hating life.
If you end up with a slow-growth business, you really have three options:
- If you can make enough money at the hobby business to live on, and you really love it, quit the day job. That’ll preserve your sanity and let you focus more on the biz—which may make it grow faster.
- You can also decide to go ultra-high-end and bespoke—that is, into the semicustom realm, where sales prices are higher. This may get you to a point where you can lose the day job. Of course, this also presupposes that you have a compelling product worthy of ultra-high-end, bespoke status.
- Finally, you can throw in the towel. Maybe it’s simply not worth it. Maybe you don’t have the right product for the time. There’s no shame in that. I’ve done it several times. Schiit and Centric are only my successful businesses. There have been others.
3.You fall prey to the unexpected.
A new competitor comes out of nowhere, with a more compelling product at a lower cost, killing your sales momentum. Your first product proves to be spectacularly unreliable, causing havoc among owners and diverting all your time to service. The market shifts to a new connector/standard/software and your product becomes obsolete.
In short, you never know what you’re going to happen, and the cards may come down against you. There’s nothing certain about starting a business, and there’s no “sure bet” product—not even after market research, focus groups, persona analysis, scattering goat entrails, positive thinking, EST, praying to your copy of How To Win Friends and Influence People, going with your gut, etc, etc…
So, in this case, what are your choices? Go back to #2 and decide to buckle down, step sideways, or cut your losses.
Yeah. I know. Even trading time for money is risky. You can chew up years of your life and end up with nothing. Or you can win big. However, in either case, you’re not jeopardizing your retirement. That’s the benefit of trading time for money.
Bottom line, the odds are better than Vegas or the lottery. What are you gonna do?
Strategy the Second: Start Low
“So what happens if I don’t have ten grand laying around to start a business, and can’t wait two years to start taking a small salary?” you ask.
Well, you can simply wait. Or you can
start low.
What is “starting low?” It’s choosing, deliberately, to start a less capital-intensive business. When Theta was imploding and Sumo folding up, I didn’t have the money to put into product development, nor the time to wait on a salary (nor was it really viable in a pre-internet direct sales era.)
So what did I do? I started a marketing agency. (AKA “design agency, advertising agency, interactive agency, or whatever-marketing-y-stuff-we-could-do-for-money agency).
An agency is much like a consulting company. It doesn’t need a ton of money to get started. You don’t need to invest in a first run of products. You don’t need huge investments in capital equipment. You don’t carry inventory. Your margin for stuff you do in-house is 100%. It’s part of the wonderful “service economy” that was going to save America’s GNP, back a decade or so ago.
Aside: What’s truly hilarious is how many manufacturing companies tried to run themselves like a service business in the wake of offshoring. They weren’t actually building anything, so products became abstract, an entry on the balance sheet. Their only job was to market them…and rake in the money. Or that was the theory, anyway. It has worked for some…and not so hot for others.
Sounds wonderful, right? Why would anyone in their right minds go into business making a product when something like that was available? Lower start-up costs, lower risk, higher margin…hell, we should all be doing it!
Four words:
low barrier to entry.
When you’re getting into a service business, you’re now up against anyone who can print a business card, throw up a $500 Wordpress site, and claim some expertise in your chosen business.
Service businesses are easy to set up, so there are a ton of them. Go into most companies with the pitch of, “We’re a design agency,” and watch them roll their eyes. They get pitched every day. They know that there will always be agencies lined up behind their current one ready to take their business.
But…in the case of Centric, we had a unique pitch. We only went after technology companies. And we led with, “I’m sure you have plenty of agencies calling on you, but I bet you also don’t have any that are headed by an engineer, who can really understand what you’re doing, who can talk to your tech team and translate their blatherings into real benefits, etc…”
We also went directly after consumer electronics, because, like, well duh. My background at Sumo and Theta gave us a real edge.
Because of this unique approach, we got a lot of business. And Centric did very well. Four months after we started up, we booked 10X my highest previous salary of business in a month.
Sounds great, right? But even with a unique pitch that gets you above the noise, starting a low-capitalization service business has plenty of pitfalls. Like:
1. Big customer bosses. When you’re in the service business, your life really isn’t your own. It’s a lot like working for a big company, with a big boss who runs everything.
Except, in this case, it’s usually a lot of bosses. Because a successful service business will have 10+ active accounts. And each of those accounts will have a boss who controls your interaction with them.
Sometimes this is great. Sometimes your bosses are sane. Or at least benevolent. Sometimes they will even fight for your right to charge them more, if the big boss on top of them changes your designs at the last moment. Sometimes, they can seem more like a friend than a boss, and the relationship can last for years.
Sometimes it’s not so great, though. Sometimes they’ll stomp in and demand free changes…on a website that’s 95% done. Sometimes they’ll blame you for an ad that flopped…after they rejected your ideas and dictated their own. Sometimes they’ll have you run another round of ideas because their gardener/wife/dog didn’t like it, after you sweated blood for 18-hour days to deliver the first ideas.
Bottom line, if you really want to be your own boss, service isn’t where it’s at. Remember, it’s called “service.”
2. Big customer losses. It’s always a scary day when your biggest customer gets acquired. Because you have no idea if they’ll be working with you anymore.
No matter the platitudes, the acquiring company has their own ideas…and you may suddenly see a big piece of your business simply disappear. If you have a dozen accounts and everything is spread around equally, this may not be a big deal. If that one client was 60% of your business (not uncommon), you may be, well, done.
3. The dreaded “wave.” When you’re not working on your business, you’re working in your business. It’s natural for many service companies to scramble for sales when times are thin, and sit back when times are fat. This leads to the dreaded “wave” of feast and famine.
It took Centric over a decade to figure out how to get off of this wave. Before, we’d have revenue swings of 20-30% from year to year—both up and down. When you’re talking about maintaining an in-house staff, losing 30% of your revenue from one year to the next is not a great way to do it.
Bottom line: in a service business? Always be selling. Always. No matter how bright the future looks.
But for me, the biggest pitfall of Centric is something I really can’t put into a generic list. Because the biggest pitfall was that Centric kept me from doing something in audio for a decade and a half.
When Centric was super-successful, it was easy to scoff at audio as something that I flirted with in the past, but really wasn’t applicable today. But with every “big boss” or “big loss,” I looked wistfully at audio, and wondered if I couldn’t do something with it again. And it took until 2009 to act.
Strategy the Third: Go Oblique
“Okay, that’s cool, but I don’t really want to do anything but audio—no agencies, no service businesses, etc—so what do I do if I don’t have a ton of money and time to come up with a product.?”
In this case, you can
go oblique.
This uses the same idea as starting low—low capitalization—but in a directly related field. Going oblique lets you start in audio, and stay in audio, until you have enough capital to create crazy products like Yggdrasil.
Huh?
Here are some examples of oblique businesses:
- Headphone cables (or other cables)
- Audio accessories and tweaks
- Audio retail
“Wait, wait, wait!” you might be saying. “Are you saying to start a cable company? Aren’t there already plenty of them?”
Well, yes and no. Here’s the thing. Headphone cables—and audio accessories and tweaks—are relatively low-capitalization, low barrier to entry types of businesses. You can start very small, much smaller than a full-blown electronics company that needs to worry about hundreds or thousands of parts and safety/emissions compliance.
And for audio retail, it’s possible to get terms (usually), which means that capitalization requirements are much less. And even if you can’t get terms, it’s easier to get a bank interested in
Sonny’s Sony Shack than
Sonny’s Maywerk Electronix.
Let’s look a bit harder at these options:
Headphone cables, general cables, audio accessories and tweaks. Yes, there are a ton of cable and accessory companies out there. Some of them sell exotic stuff at eyewatering prices, and some are affordable.
But no matter how many companies there are out there selling cables and accessories, I bet there’s still room in the market for a savvy competitor. Where’s the well-known option for affordable headphone cables made in the USA? Yes, I know there are a ton of them, but these are usually smaller companies without a lot of brand recognition. Where are specialty ultra-shielded products for phono use that are easily accessible and don’t cost a bazillion dollars? Where are the sensible tweaks that have real, measurable results and don’t need a second mortgage? For the right individual, starting a strongly branded company with great prices in those realms may be a path to success.
But note the “may be.” Like everything else, this is a gamble. I may be talking out my butt. Proceed with caution. YMMV.
Audio retail. In recent years, we’ve seen the rise of several strong competitors in the audio direct sale environment, including companies like Sonic Electronix. These are directly taking on the more established audio online sales companies like Audio Advisor and Crutchfield—and they’re growing fast.
Yes, these are big names. But starting an online retail presence doesn’t mean you have to sell everything from Sennheiser and Sony. It’s possible to be a lot more focused and selective. (For a brick and mortar take on that, check out Cloth and Metal, who sells Schiit—amongst many other things.)
Or, you could even take a hybrid approach—selling your own cables and a select offering of other audio products. Or you can look into a whole new retail model. The point is that it may be easier to start in retail, build a customer base, and then look into making your own complex, high-risk products.
Strategy the Fourth: Intrapreneurship
Whew. This is turning into a long chapter. Don’t worry, the last two strategies will be shorter.
So what is intrapreneurship? Well, it’s like entrepreneurship, but within a company that you work for.
Think of it like this: If you work for a company that’s close enough to the audio biz, you may be able to convince them to fund an excursion into audio…with you at the helm. You could even end up with royalties based on performance, or even ownership, if the company is a separate entity?
“Never gonna happen,” you grump, crossing your arms.
Well, it does happen, and it has happened many times in Mike’s companies. Theta worked that way. Dave was a critical part of Theta…but his contributions were paid in large part via royalty. I did Cobalt for the same reason. Other employees made other products and were paid the same way. At least one major audio company got its start through Theta employees (and that’s not counting Schiit.)
And Schiit works the same way. We’re funding the efforts of a couple of employees who want to do things that are off the beaten path. If they turn into products, everyone benefits.
So yes, it happens. If you’re close enough to your chosen product, and you have an idea, it doesn’t hurt to ask.
Strategy the Fifth: Buy the Dream
And to wrap up, here’s the big one. Go all-in. Mortgage the house. Sell the cars. Cash in the 401k. Because, let’s face it, a lot of established families who say, “We have no money to start a business,” really mean, “We have no money we’re comfortable using.”
And yes, I totally understand. I never had the courage to hang my butt out that far. Because the pitfall is obvious: complete financial annihilation. I’m not comfortable staring bankruptcy in the face.
But maybe you are. If it works for you, kudos.
Bottom Line: If You Want To Do Something, Do Something
And there it is. You can sit back and sigh wistfully, you can make up excuses to put off work, or you can angrily pound the keyboard, spreading your message board wisdom about how current audio products are fubar.
But…every sigh, every excuse, every comment does only one thing—they take away the time you need to make a successful business.
You in?
