
Failed Startup's Final Income Statements Reveal Grave Error - xadxad
http://www.businessinsider.com/jody-sherman-ecomom-and-a-grave-financial-error-2013-4
======
jacquesm
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.

~~~
InclinedPlane
The more examples I see the more I'm convinced that a big cause of failing
businesses is just failure to do math. I've seen so many businesses struggle
because they failed to do the simple thing: concentrate on profit margin and
focus on maximizing it.

~~~
LancerSykera
I work for a plumbing/heating/HVAC distributor and the absolute biggest number
they look at is margin. Real simple shit, especially when you use a system
that always shows the GP% on every screen.

------
auctiontheory
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
Quite interesting! Hadn't ever seen that but it's rather wise from an
accounting standpoint.

~~~
littlegiantcap
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.

------
loganfrederick
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
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?

~~~
nostromo
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.

~~~
dllthomas
> 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
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.

~~~
Silhouette
Amazon is an interesting case, partly because they really are doing on-line
commerce and product distribution infrastructure on a scale that basically no-
one else does.

I'm wondering how their next chapters are going to play out when (a) people
get fed up with the automatic pricing mechanisms that keep dramatically
changing the prices with no logical basis from a customer's point of view, and
(b) too many bricks and mortar stores start to go under, and people can't
browse there before sneakily shopping on-line afterwards any more.

Here's an obvious example from just this past week. Back at Christmas I bought
the first season of a show, and after enjoying the first few episodes, I put
season 2 on my Amazon wish list, which I basically use as a convenient
bookmarking tool. At the time, both box sets were about the same price, and it
was roughly the going rate for such things. A few weeks later, I'd finished
the first season and went to order the second, credit card literally in hand,
and found that they had basically _doubled_ the price since I bookmarked it.
There was no obvious justification, so I assume it was their automated pricing
doing something funny. In any case, I immediately removed it from my wish
list; I enjoyed the show, but not that much. Last week, I went back to take
another look in case the price had come down again, but no, season 2 is still
way more than season 1 and other comparable products. The following day, I
learned that a TV channel I get is showing both seasons back to back, so if I
just wait a few days I can have the whole thing for free. Score: Me 1, Amazon
0.

It's not as if this is the first time I've seen their pricing do silly (from a
customer's point of view) things, or the first time they've annoyed me for
that reason, but it's the first time it was so silly that I just walked away
from a purchase without hesitation, and in this case clearly I'll never go
back now. I've heard similar anecdotes from enough friends now to realise that
I'm hardly alone, either.

This leads me to wonder whether all of this computerising and optimising that
they are doing will backfire at some point, and a lot of the advantages they
seemed to have in better pricing compared to bricks and mortar stores were
actually temporary or illusory.

------
arbuge
>> 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
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
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
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
OK, maybe I meant "Could've got it. Chose not to."

------
MattRogish
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
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
> _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._

This is absolutely true. I'm getting downvoted farther down on this thread for
a similar observation, and for attributing this obsession to the SV culture,
in particular.

This article is attempting to assert that Mr. Sherman was literally incapable
of understanding basic math (i.e. the concept of margin). I think it's more
likely that he was well-aware of the definition but was focused on growth at
all costs.

It's funny, because you look at companies like Twitter and Pinterest which
come up to scale with absolutely no revenue model, let alone revenue. That
seems to be "normal". Nothing to see here. But, when a company with actual
revenue deeply discounts products to scale up, it's somehow shockingly bad.

I'm not arguing that Ecomom had the right strategy here. I actually think they
did not (partly for the reasons you mentioned). But, then in the same universe
Pinterest could become the darling with millions of users and no revenue
_model_?

It's funny how twisted things are without people seeming to notice the
contradictions.

~~~
mpyne
It is certainly wise to be concerned with having a way to bring income to a
profit-seeking entity. But companies like Pinterest and Twitter have very
different business realities than companies like Ecomom which market in real
goods which they have to pay to buy, pay to ship, pay to hold and even
apparently pay to sell and ship again.

When your business is all-online, even at scale, it may be feasible to figure
out what you want to do after you make your service big (and indispensable).

~~~
unclebucknasty
They are definitely different businesses. No argument there.

But, there are still very real costs involved with the Pinterests/Twitters of
the world--especially at scale.

Money lost is money lost. Whether it's because your price point doesn't allow
you to recoup inventory carrying costs or because you have costs with no
revenue.

But, I think the main point here is that it would seem more feasible to
discount products and give up margin as a means to growth than it is to just
grow with no idea of how you'll _ever_ monetize.

I guess I don't understand what good it is to have a big, indispensable
business without knowing how or if it would ever make money.

That we're having this discussion is kind of homage to how odd things have
become.

------
richardjordan
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.

------
rdl
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>

~~~
rocky1138
Was there a board? From what I can tell it looks privately held with one
majority shareholder.

~~~
rdl
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
How did you get your hands on this?

~~~
ims
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>

[2]
[http://investing.businessweek.com/research/stocks/private/pe...](http://investing.businessweek.com/research/stocks/private/people.asp?privcapId=98789527)

------
jwheeler79
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!

------
unclebucknasty
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
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.

~~~
ScottWhigham
Well said. And don't forget that, for many people, there's a difference
between understanding a basic concept (margins) and understanding its effect
on you/your baby/your life. We humans do this as a matter of routine (smoking,
alcohol, obesity, etc).

~~~
unclebucknasty
> _there's a difference between understanding a basic concept (margins) and
> understanding its effect on you/your baby/your life._

That's absolutely true, but that's more of an abstract observation of human
behavior. On the other hand, the author is stating that Mr. Sherman
_literally_ did not understand the basic math of margins (ex: that the more
products they sold below cost, the more money they lost).

In my opinion, that's a completely ridiculous notion. Such statements are
insulting and fit with the tone of the article, which essentially attacks Mr.
Sherman as incompetent and a virtual imbecile. The author appears to have some
other motive to be so bluntly disrespectful to someone who has passed. C.Y.A.?
Personality conflicts? Something else? Who knows? But, since Mr. Sherman is
not here to defend his actions or rationale, it seems a shame to allow these
ridiculous memes about him to thrive.

I'm sure there is valid criticism that one can heap on Mr. Sherman's days at
the helm of Ecomom and the decisions he made (including the one to discount
products and give up his margin). If one wants to critique that, then it's
fair game. But, to sit around and suggest that the man literally couldn't
understand basic addition and subtraction is ridiculous. It is no credit to
the author to insult the man when he's no longer here to defend himself.

~~~
plorkyeran
It is certainly quite possible that "Phil, just bring me a forecast that shows
how much we need to sell to break even" is a gross misrepresentation of what
he actually said, but if it is at all true then Sherman did in fact
_literally_ not understand the concept of margins.

~~~
unclebucknasty
Maybe. If.

If he said exactly that. And, if he meant exactly that. And, If there's no
other context. And if...

But, Phil seems to be unsynched with himself. On one hand he accuses Mr.
Sherman of _literally_ not understanding margins. On the other hand he clearly
implies that Mr. Sherman deliberately avoided talk of margins/profits in a
company meeting because he was a "master marketer" who "led a management
meeting that focused on an awesome feel good marketing plan."

So, by that, he is clearly indicating that he thought Mr. Sherman understood
margins well. So well that he was deft enough to avoid speaking of them;
instead using his "master marketer" skills to somehow mislead management and
divert their attention away from margins.

Completely contradicts the notion that he didn't know what margins were.

And why on earth is Phil speculating about one side of phone conversations
that he overheard? That's not his place (as a controller), and it's amateurish
at best.

There are some "interesting" statements being thrown around in the article.
They seem to be gossipy, reckless and, at best, inconsistent.

------
feralchimp
"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
That's an oldie but a goodie.

Saturday Night Live Clip (First CityWide Change Bank 2)
<http://www.imdb.com/video/hulu/vi416284697/>

------
milkshakes
"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
Oh my god. What clown _couldn't_ get personally rich with that setup?

------
unreal37
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
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.

~~~
socalnate1
This is just plain not true. There are many e-commerce companies who are
profitable and healthy immediately.

Start a store with Shopify or Miva Merchant for a low monthly cost, work of of
your house and sell your goods for more than they cost you. Ton's of folks do
this and are very quickly profitable on a small scale.

If you are trying to be Amazon or Walmart and sell non differentiated products
for rock bottom prices, then you are correct. But there are plenty of
companies content to run $2 Million - $20 Million dollar businesses without
having to go through the pain of losing money for 3 years.

~~~
sachingulaya
Since I can't reply to the comment below me--Now that we understand ecommerce
we're profitable from day one with our new brand launches. It usually takes
about 2-3 months before we're doing 20k/mo revenue online with 100% margins.

~~~
davidandgoliath
100% margins? _scratches head_

------
fitandfunction
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.

------
dools
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.

------
msandford
If all that's true, it's simply breathtaking.

------
smartician
| "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.

------
atechnerd
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
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.

~~~
trotsky
In the end, the idea that Jody lacked a basic understanding of margins after
years of being a retailer clearly doesn't make sense. Nobody sells goods for
lower than their cost of acquisition without being aware.

It's too bad tech journalism is a farce now, 15 years ago the sj mercury news
would have actually put someone on it that had a basic understanding of
extracting truth from lies. There are plenty of people who might talk, if they
had any belief it'd actually result in a researched and unbiased piece.

------
yannisp
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!

------
jsumrall
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.

------
photorized
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
No it isn't. It's a business plan problem. Stop blaming the developers for
everything :)

~~~
photorized
As a former dev myself, I've seen that problem quite often. :)

------
theflyingkiwi42
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
I think Zappos' and Ecomom's stories are way different. Are you referring to
the info in the Zappos' book, delivering Happiness?

~~~
theflyingkiwi42
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>

Seems pretty similar to me. The only difference is that Zappos went after a
much larger market.

~~~
vessenes
I believe these are very different situations -- Zappos was covering some,
nearly all of their SG&A with product margins. Ecomom was, according to the
information in the link, needing to pony up cash to cover negative margins on
product sales.

------
unreal37
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.

------
jwheeler79
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?

------
dennisgorelik
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).

------
james1071
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.

------
lhnz

        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?

------
conanbatt
How did the "outside accountant" miss this :S.

~~~
jarito
He didn't. That's why he is refusing to talk through lawyers.

------
lectrick
So the "grave error" is a lack of simple understanding of what a margin is?
Seriously?

------
yekko
School should teach critical thinking skills and I guess the concept of
profit/loss...

------
ErikAugust
Multiply by a negative number - and guess what? You get a bigger negative
number.

------
olalonde
I assume "Magneto" is in fact "Magento".

------
Blockhead
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?"

