Entrepreneurial Mistakes #1: Minimize Overhead, Take One.

At lunch last week, friend and fellow seriel entrepreneur said, "Nothing can replace learning from experience."  He followed it with, "The great thing about being a lawyer was that I could learn from experience, but it was other peoples' experiences, so I got to learn while my clients took the lumps." 

True, and valuable.  I thought I'd share some of my mistakes from my first few ventures.

Mistake #1: Minimize Overhead, Take One

I can remember distinctly the morning I realized that I had to build a special machine to manufacture Innegra fiber.  I had been up all night watching a few thin lines of fiber crawl through a good friend's fiber machine, breaking out every time the HVAC kicked on, every time the water evaporated, every time the oven blinked...every time it felt like it.  We ran for 24 hours and ended up with about 30 lbs of scraggly, lumpy fiber that I was later barely able to weave into a few dozen yards of seatbelt-like fabric.

I should mention here that the scrappy seatbelt fabric tested fantastic, like nothing else in the world.  But it was miserable to make.

That morning, tired and frustrated after only three hours of sleep in the local no-tell motel, I talked through the economics of my friend producing the fiber.  IF we could get to 50 lbs/hr, (50 times our effective output on our 24 hour run) and IF we could basically eliminate scrap and IF we spent $40,000 to upgrade the machine--then he might be able to make it for us for about $0.25/lb more than what I was hoping our selling price would be.  Somehow in this frustration, I decided that Innegrity needed to build a pilot machine ourselves, and set about designing it, purely from my imagination.  I still knew almost nothing about the process and what it would require at scale.

As it turns out, my good friend may have been willing to invest the $40,000 and we could have run a few dozen trials on his line for minimal cost, then paid him to make the fiber and sold it at cost until we reached some volume.  It would have been a zero overhead business, and we could have spent $200,000 to generate my first $200,000 of sales and started almost immediately.  Doesn't sound like much of a business, until I describe what I did instead.  Here goes:

I chose to build a pilot machine.  This required a year to build the machine, took another year to get it going right, and cost us $400,000 in hardware plus that much more in people, rent, and soft charges like power, utilities, internet connections, etc.  Raising that kind of money early on was a major distraction, and major time sink.  I asked my best friend in the world to leave his cushy job at IBM, take a big pay cut and move to Greenville SC, where it is very difficult to be single in your late thirties and maintain a 90 hour work week.  He built the pilot machine and made it work, for which I will be forever grateful.  But he was miserable and left two years later and our friendship barely survived.  The decision in early 2005 to build rather than continue wrestling with outsourcing resulted in a pilot scale product launch two years later which was received with "This is great, but your quality stinks, and we need 10 times as much as you can make."

I'll tell you what we did after that next time.  This story only gets better.

Had I made the other choice, to partner with a trusted friend as a manufacturing partner, we could have paid as we went, and after maybe $50 - $100,000 and maximum six months, had enough fiber to test the market, and found out that the selling price needed to be 3-5 times what I thought it should be, because the value was so much more than I anticipated.  But, alas, I believe pricing and value is another mistake to describe.  This series may take a while...