Mistakes Millionaires Make: Lessons from 30 Successful Entrepreneurs

possible.

PART ONE

INTRODUCTION

There has never been comprehensive research probing common ways that entrepreneurs lose it all. No materials are available to educate entrepreneurs about business pitfalls. There are no college textbooks, classes, workshops, or business books.

To date, the only individuals who seem to have learned these hard lessons are unlucky folks who have fallen off the edge and been wiped out. This book is a compilation of what thirty entrepreneurs—and I, myself—learned along the way.

I conducted interviews with these entrepreneurs, who told me how they had made millions and then lost everything. Many of these individuals remade their fortunes within a few years. A few of their stories brought tears to my eyes, while others left me in disbelief.

Readers need to understand why this book is important to me. So it begins with my story—twenty-five years in the making but only pages in the telling. The remaining chapters recount the stories of the highly successful entrepreneurs who also fell into the abyss. My hope is that I can prevent hundreds of entrepreneurs, aspiring entrepreneurs, and students of entrepreneurship from making the same mistakes. Or, for those who already have undergone business reverses, perhaps it will help to know that others have survived and gone on to prosper.

Entrepreneurs face numerous risks, not just one, and they are covered in this book’s various chapters and sections. Each chapter stands on its own; there is no continuing plot in these pages. So I encourage you to consider reading the chapters that are most relevant to you first.

It is my hope that the wisdom gained from this research will help entrepreneurs identify their blind spots and motivate them to make changes in their strategic plans, staffing, financial structures, estate plans, and insurance policies—not just in their businesses but also in their personal lives. I also hope that CEOs will share this book with members of their leadership teams as well as with family, friends, and other stakeholders in the welfare of their companies. It is essential that entrepreneurs surround themselves with those who understand the risks that CEOs face and who can help safeguard them against those risks.

Finally, I hope readers find motivation, perseverance, and hope in these stories of entrepreneurs who lost everything and then gained it all back.

CHAPTER 1

FALLING OFF THE CLIFF— MY STORY

The more assets an estate has, the more the fight turns into a feeding frenzy for the attorneys.

This chapter begins my story—how I started and grew two successful Inc. 500 companies, then made the mistakes that cost me $100 million and a decade of agony.

I thought I had it made. I thought I had done everything a highly successful entrepreneur needed to do to escape falling off the edge and losing everything. I had a business degree and an MBA from California State University, Long Beach. I had completed countless hours of continuing education every year, and I had what I thought was a comprehensive estate plan with millions of dollars in the bank. I lost it all: my wife of twenty years, $100 million of hard-earned wealth, and a track record of success after success.

I am the youngest of four kids and was raised in New England and California. We moved around often because my father was making his way up the ladder in corporate America. He ended up as CEO and chairman of several multinational computer or technology-distribution companies, some of which were on the New York Stock Exchange. An atmosphere of competition, hard work, long workweeks, and business conversations were a normal part of family life when I was growing up. I started working at age fifteen—I was able to obtain a motorcycle license to drive to my job—and I also wrestled all the way through graduate school as a Division I NCAA heavyweight. School was hard work, but I loved learning.

After I finished my MBA, Deloitte hired me as a staff consultant in the San Diego office. The other junior consultants at Deloitte and I would compete to bill the most hours to our clients. That started a pattern of sixty- to one-hundred-hour workweeks. I believed in the concept of work hard, play hard. And I met Linda, who was also a consultant at Deloitte. She and I were married six months later.

MUNIFINANCIAL

In 1989, when I was twenty-seven, I started my own company, MuniFinancial. I had gotten some much-needed counseling from my dad and an older brother, Jim, who initially was a partner in the business. Jim provided some software development and $25,000 in capital to fund the start-up. In six months the company was launched and profitable. After about a year I bought out my brother’s shares and owned all of the company.

MuniFinancial started as a software company to help cities and counties in California manage debt financings. Almost immediately, the clients asked me to actually manage the financings for them rather than just sell them software. At that point, MuniFinancial morphed into what became the largest service provider of municipal debt management in the United States. Within six years the company was involved with about 1,500 bond issues in twenty-six states, with seven offices nationally.

MuniFinancial was making about $1 million a year in profit on income that was steady and highly predictable. This allowed me to buy a beautiful office building, a second home, classic cars, and a collection of fine art. My wife and I also built a house on a large estate on which to raise our daughters. The income enabled us to become involved in various philanthropic causes.

Entrepreneurs know that ownership is ripe with challenges. I also lacked experience—not unusual for someone in his mid-twenties or early thirties. I made plenty of mistakes along the way, but my success made me arrogant and cocky. It truly seemed as though everything I touched turned to gold. Or so I thought.

By 1996 I had sold MuniFinancial to MBIA, Inc., a Fortune 100 financial services company headquartered in Armonk, New York, for a package worth more than $10 million.

After the sale I stayed with MBIA for two years, helping them with a roll-up strategy for municipal services that they abandoned after a year. I spent the second year helping MBIA divest its subsidiaries while I looked for my next business opportunity. My overall goal was to find a niche where I could do good and do well. I wanted to have a business that could explode with opportunity but also help the world be a better place. I must have looked at a dozen potential new enterprises before finding one that seemed to fit the bill.

TURNKEY

All through the 1990s California continued to fall behind in the quality of its K–12 public school performance and facilities. It was common to drive past a public school campus and see classrooms housed in cheap portable trailers. Partly due to the possibility of earthquakes and the need for schools to be safe, the process of getting a school facility approved and built was extremely costly and time consuming. It would commonly take five or more years to design and construct a simple elementary school campus, and it would cost far more than anyone had imagined. In this inefficiency I saw an opportunity to better the world and make a lot of money.

The business idea behind TurnKey was to make the development of schools faster, more affordable, and of absolutely the highest quality. There were five of us founders, each with our own expertise, but we shared a common vision to improve the process of building schools. My role was to help capitalize the company and act as CEO. We literally started with a clean whiteboard and devoted a weekend to developing a business model to design and build schools in half the time and for 20 percent less than normal. We combined component-based CAD designs (think Legos), modular all-steel construction, green architecture, and the latest in educational theory.

We started operations in 1999 and finished our first year of business by securing a few contracts, hiring a few key people, and developing basic systems. By 2000 we had built our first school and had another on the way. We were making all sorts of mistakes by building a business that was far too complex, but the demand for what we were offering was enormous.

SKYROCKETING GROWTH

Our sales by 2002 were $25 million. A year later we had doubled that. We were working like mad to develop the infrastructure necessary to manage this wild growth while at the same time adding more services and functions and therefore making our complex business even more complex.

In 2003 we also opened our own off-site construction plant. We had designed and built it ourselves—almost 100,000 square feet on fourteen acres and very impressive to see. Truly it was the best plant anywhere. We implemented as many cutting-edge innovations as possible and set the industry on its ear. In the same year TurnKey also acquired an electrical contracting company that became the basis of the on-site construction crews. This was far too much expansion in one year. Although the employees found the environment at TurnKey exhilarating, they were highly stressed.

Nevertheless, TurnKey continued to expand. Our run rate for sales was on track for $100 million in 2004 and for more than $200 million for 2005, and we had 450 employees. The sky seemed to be the limit.

CHAPTER 2

HOW THINGS GOT WORSE

When times are good, entrepreneurs often feel like their clients are partners.

The TurnKey debacle and its collateral damage, which I detail in this chapter, extended far beyond what was ever taught in business school. Some of what occurred seems impossible, but, as we all know, reality is stranger than fiction.

A CLIENT PARTNERSHIP

While TurnKey was expanding, a relationship with one of the company’s clients started to deteriorate, which contributed greatly to our financial problems. When times are good, entrepreneurs often feel like their clients are partners. In this case, though, when things went bad, our school district partner used TurnKey as a scapegoat.

In 2002 the sales team at TurnKey met with representatives of a school district in Santa Barbara County. Their facilities were in terrible shape, with the highest percentage of students in inferior temporary classrooms, more than any other district in the state.

The district badly needed several additional new schools, but none had been built since the 1980s. Not only were there no financial resources to construct the buildings, the district had no human expertise to do so. It only knew how to install more portable classrooms.

The district hired TurnKey to build its first new school at lightning speed and for a significant savings. It took just a year and a half of design, approval, and construction, and the district loved it.

Complicating the situation, however, was the fact that the lack of new schools had affected the educational schedule. In late 2002 I attended a meeting in Sacramento about school funding in which the district’s superintendent testified that the district would never be able to get off multi-track year-round schooling because of its hardship and huge shortfall of facilities.

This meant that schools would operate year-round without traditional breaks and vacations, making the best use of limited facilities but imposing difficulties on the community, since, invariably, families have children on different tracks whose schedules and breaks seldom coincide.

After he testified, I asked the supervisor if he would be interested in a proposal for us to help the district obtain funding and build enough new schools to return them forever to traditional schedules. The answer was a resounding yes!

A couple of months later, at the end of 2002, the district hired TurnKey to plan, retain funding for, design, and build about eight new schools with a total value of $85 million. The district would be able to remove nearly all of the portable classrooms and eliminate the multi-track, year-round schedules. This was exactly what we were in business for: doing good for the client and its community.

IGNORING STANDARD OPERATING PROCEDURE

Unfortunately, there was a difficult new deadline. California planned to remove the district from its special hardship status as of October 2003, and TurnKey had to meet that date with all of the plans, or the district would lose $35 million of the $85 million in state funding for the new projects. Without that money, the district would be unable to build enough new facilities.

Both TurnKey and the district understood that actually preparing all the plans and gaining approval before the deadline was likely impossible, but we agreed to do the best we could. TurnKey design teams worked tirelessly to complete everything in less than half the normal time, although that meant departing from standard business processes. In the end, TurnKey made the deadline and secured the $85 million, an amazing accomplishment.

However, although the plans for the projects were sufficiently detailed for funding approval by the state, they were not finished enough for construction. TurnKey wanted to spend six more months to clean up and complete the plans, then bid them out in May or June 2004. The school facilities would be built by June 2005—plenty of time for the opening of school in August of that year.

By October 2003, however, the district had learned that the state would no longer pay districts an increased operating budget allocation if they were on a year-round schedule, starting with the 2004–05 school year. The superintendent said it was imperative that the new schools open by August 2004 to save the district several million dollars. TurnKey reluctantly agreed, with the understanding that the district and TurnKey were partners. So far, TurnKey had always come through, and the district appreciated those efforts. But once again TurnKey had to break away from best business practices.

BUILDING WITHOUT FINISHED PLANS

Normally in construction, the contractor (TurnKey here) sends out the architect’s plans to obtain bids from subcontractors. The contractor then selects the qualified subcontractor with the lowest bid and issues contracts for the work to be performed. This locks in the costs to the contractor, who can then manage the project with its profit and overhead predetermined. In this case, TurnKey was not able to put the insufficiently developed plans out for bids in advance.

Instead, all of TurnKey’s design resources had to focus on fixing or completing the belowground infrastructure and then prioritizing what was imperative to complete next, creating a chaotic organizational bottleneck. In addition, because of the increased risks posed by less-than-complete plans, subcontractors submitted higher bids. The combination of these issues made the projects incredibly risky and unmanageable from the very beginning.

And because these projects represented such a large portion of TurnKey’s business, the company could not effectively manage its own business. By not sticking to best practices, TurnKey was setting itself up for disaster.

Even so, in August 2004, TurnKey and the district opened the new schools, and by running on a traditional schedule the district saved millions in operating costs. The impossible was made a reality with a massive effort, great risks, and huge costs. The extent of those costs would only become clear later.

LESSONS LEARNED

Do not vary from proper business practice or procedures to meet clients’ needs.

Retain excellent legal counsel. When things start to turn against the entrepreneur, have counsel focus on protecting the family and the company.

Maintain proper errors & omissions (E&O) and directors & officers (D&O) insurance at all times, even when strapped for cash.

CHAPTER 3

A DECADE OF