A $60,000 dollar investment I made in 2012 turned into a $60,000 dollar mistake by the end of 2015, and this is the story of how it happened.
In 2011, a confluence of events led me to a fellow entrepreneur (all names have been removed to protect the innocent – and the guilty) that was smack dab in the middle of getting a new company off the ground.
That in itself may seem inconsequential, but as it turns out, he and the two other founders were getting ready to launch a business very similar to the one I had been envisioning for a couple of months.
Subsequently, I met with one of the founders to discuss the specifics, and even signed an NDA (non-disclosure agreement) that would bar me from becoming one of their competitors for seven years. At that point, I was locked in.
The conversations continued, and eventually I met with the other two founders. It took some time to sort out the details, but I knew that I wanted to invest in a company like the one that was in the midst of being built.
And because I was still relatively new to business, I knew that I would need to build a team to supplement my weaknesses, especially if I were to do it on my own.
So, I thought to myself, if I invested in this business, I could leverage a pre-existing structure and decided to move forward with it.
Now it was a matter of coming up with the money. I would need to invest $250,000 to become a full-fledged partner in the business, and that’s originally what I wanted to do.
I wasn’t sure how I would get that kind of money, but oddly enough, I still had a good feeling about it.
I started talking with various agents to explore my options – many of which fell through.
At long last, it was determined that I could take out a second mortgage against my home. It was a serious risk (I ended up selling my home shortly thereafter), but I felt strongly about my dream, and decided to move ahead with the paperwork.
Ultimately, I wasn’t able to secure a quarter of a million dollars, but I was able to borrow just under $60,000 to invest into a music industry tech startup.
Music Industry Tech Startup
The business concept was simple enough. We set out to create an online music store that leveraged the networking marketing/multi-level marketing model.
To my knowledge, nothing like it had been done in the past. But I was prompted to do a bit of research, and that’s when I came across BurnLounge, a company that had been sued by the Federal Trade Commission for being an illegal pyramid scheme in 2007.
I was reassured by one of the founders that BurnLounge was a business built on pretense from the start, and that it was ancient history.
Incidentally, the company lost the suit in 2012 and the appeal in 2014. In 2015, the FTC started returning $1.9 million to people that lost money in the business.
Soon, I was contracting with the startup as a digital marketer. Everything I had learned as a musician, and everything I was continuing to learn as a podcast listener proved to be a great asset to my duties.
I did a lot of blogging work for them, and was also responsible for social media marketing, email marketing, copywriting, backlinking strategy, analytics reporting, podcasting, and graphic design – all on a part-time basis.
Failure to Launch
At long last, launch day had arrived. But we couldn’t launch.
I hadn’t heard much from others involved, so I was mostly in the dark about what was happening leading up to the so-called launch day.
Then I found out the service wasn’t much closer to being ready than it was in the preceding months.
As it turns out, we were experiencing a lot of technical issues with software – using a mishmash of tools that didn’t play well together.
In due course, the service did “launch”, but even then it was littered with problems, and sometimes willing customers couldn’t even checkout to purchase the music they were interested in buying.
Since we didn’t have a working model, my contracting work was put on hold – there was no point in marketing something that wasn’t there.
Burnt out, I went on sabbatical for a month.
The broken online store was, in effect, a test launch for the final product we were trying to deliver. Perhaps it should never have been announced to a bigger audience in the first place (I think we lost a lot of credibility and trust), but it did give us the chance to figure out where our shortcomings and oversights were.
The company began anew to develop a fresh platform, and rebranded. I was assured this was always a part of the plan – not an afterthought.
Instead of relying on pre-existing software, we decided to start building our own from the ground up. And when I say we, I wasn’t involved in the decision-making or operations of the company from this point forward. I wasn’t even contracting, but I was on weekly video conferences for a while.
On the surface, it seemed like a sensible idea to build a bespoke solution. After all, we were having trouble making disparate pieces of programs talk to each other. If we built our own solution, God willing, we wouldn’t run into that problem.
The store did eventually launch in Beta form, and the platform was far superior to the original. By the time it had launched, however, I had lost all enthusiasm for the idea I was once so on fire for. I couldn’t have told you why, though.
But I did get a piece of good news. Originally, I was told that as an investor, I couldn’t participate in the business as a distributor.
A distributor, in effect, would be an independent business owner with the company. They could buy music, sign up clients, and sign up other distributors to build their own businesses.
But the CEO told me that they were going to make an addendum to shareholder contracts so that we could build equity in the business as distributors. I decided to take advantage.
I re-engaged many of the people I had previous contact with, including those who performed at the handful of events I had a significant part in organizing.
But it didn’t appear as though there was any more interest in the project than before. We had a much sleeker platform ow, but again, we had lost quite a bit of trust the first time around, and it seemed as though many weren’t interested in the business model after all.
There were some minor successes among distributors, but the platform still needed work (it was a Beta launch, after all), and, in my opinion, they had yet to find their footing with their marketing.
The explainer videos, for example, just didn’t communicate the idea well, and weren’t enticing to musicians – our target market.
This is probably the point at which I should have realized that this business just wasn’t going to fly.
The CEO told me that they would be pivoting – yet again. They wanted to make the platform an intersection of an Etsy marketplace and an individualized boutique online digital media store.
I wasn’t completely against the idea, but I also didn’t think there was any need to change the direction in which we were heading.
What needed correcting, in my opinion, was the marketing as well as the compensation plan. There were a lot of people complaining about the lack of good content too, but that was something we could have solved in time, by expanding our influence. A grassroots company shouldn’t be worried about getting big label artists to sign on – especially when they don’t have a working platform. We would have gotten there in good time.
Then, I didn’t hear anything about the business for months.
A couple of friends prompted me to look into what was going on with the company. But it was too little too late – my fate was with a sinking ship.
It wasn’t long before I got a call from the CEO in December 2015. I jumped on a conference call and was told that the company would be folding.
The primary investor didn’t want to put any more money into an unprofitable project, and the CEO would be pursuing other opportunities.
There’s not much I could have done to stop this from happening. I did not have a controlling vote in the company, and I wasn’t the least bit involved in the day-to-day by the time it folded. I also didn’t have the capital to keep it alive.
My only opportunity would have been to sell the shares when they might have been worth something, which was dubious at best.
What Went Wrong
In retrospect, the warning signs were somewhat obvious:
- I was asked to sign a NDA. I’ve since learned that rarely if ever is this a best practice in business. It might seem smart and diligent on the surface, but if you’re worried about people stealing your idea and starting a competing business, you’re missing the point. Competition often validates a market.
- The failed launch attempt. When the original concept failed to make good on its promises, it lost credibility with the people who might have otherwise been interested in giving the service a try. There were major delays and problems with the service, even when it was eventually “launched.”
- I lost interest in the idea. Perhaps burnt out on network marketing, I had all but lost enthusiasm for the business model by the time we were ready to start spreading the message. That’s a whole other story, but suffice it to say that I probably should have been listening to my intuition.
- Poor marketing. Spreading the message is much harder when you don’t have your marketing nailed down. If you want to make a go of it, you must remove extra steps that exist between you and reaching new customers.
- The pivot. At best, it was an attempt to deflect earlier failures and to take the business in a profitable direction. At worst, it was a delay tactic meant to deceive shareholders into thinking forward progress was being made.
What I Learned
Failures sometimes teach you more than your successes. In this instance, I learned that:
- Enthusiasm doesn’t equate to success. It seems obvious. But you don’t start a business without first being excited about it. In case there’s any doubt, I genuinely believed in the business concept, and that it could add a lot of value to a lot of people. A LOT OF VALUE. But even if the idea is amazing, you can’t ignore execution. We executed poorly.
- Enter a business situation in which you have no autonomy at your own peril. I had little say in the day to day activity of the company – especially as it pertained to major decisions. I could have just as soon pursued my own version of the same business idea. I almost certainly would have run into certain roadblocks anyway, but I was willing to do whatever it took to get the idea off the ground and would have bootstrapped my way there.
- You must get to revenue as soon as possible. We spent a lot of time figuring out things with the compensation plan and software development. If it was my business, I would have spent more time and energy validating the business idea instead of trying to get everything picture-perfect. Perhaps easier said than done in the network marketing industry, but I would have wanted to know that I had something on my hands before putting so much time, money, and effort into something that would never bear fruit.
- You must inspect what you expect. I didn’t know what was happening in the company much of the time, especially after I was let go as a marketing contractor. Sadly, there wasn’t much of an incentive to keep looking into what was happening in the business, so oftentimes I didn’t. When it comes to investments, you should always inspect what you expect. I feel I could have done a better job of that.
What I Would Have Done Differently
Perhaps I would have gone and started my own network marketing business in the music industry. I would have been in competition with the company mentioned here, but as it turns out, they wouldn’t have posed much of a threat.
I already had my own ideas about how the business would be and could be run. What I didn’t know or understand was the legal side of things, so I would have enlisted the necessary help.
I also would have validated the idea early. If no money could be made in a business like the one we’re talking about, I feel I would have figured that out within a year or two, which would have presented the necessity to pivot or back out.
And, had I invested in the company anyway, I would have spent more time looking into what I was invested in. Maybe I would have found an early exit – maybe not.
This is not an exercise in blaming and finger-pointing. I could have made different decisions, so I am just as responsible for this failure as anyone else.
It is entirely possible that the business died of suicide and not of homicide. I’ve since heard rumors that would suggest this was the case, but I don’t have access to all the details.
Therefore, I’m not going to postulate any further. Some lessons are – and were – learned the hard way, but my business and investing career carries on.