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Business Is a Roller Coaster, Not a Merry-Go-Round

WHEN YOU GO to the amusement park, do you prefer the roller coaster or merry-go-round? The experiences could not be more different.

The roller coaster can be really scary, with highs and lows, thrills and chills, and unexpected happenings at every turn. While you are waiting in line, the excitement of the unexpected is intense—sometimes good, sometimes bad. With the roller coaster, there is quite a bit of risk and reward involved. If you love the ride, you will have the time of your life. If you hate it, you may be dizzy or puking for the rest of the afternoon.

The merry-go-round on the other hand is, well, pleasant. Heck, it is called a merry-go-round! It may bring you some enjoyment but certainly not excitement (unless you are two years old). The merry-go-round is predictable—you know exactly what is going to happen on the nice little ride around in a circle. It may be enjoyable, but it doesn’t send the adrenaline pumping through your body like a roller coaster. The merry-go-round is a low-risk ride. There is no surprise in the outcome; you know what you are going to get beforehand.

It doesn’t matter which you like—it is your personal preference. (I prefer a third option, which I call the “food ride.” This is when you stand in line at the amusement park and get to a counter where you can order an ice cream cone or a slice of pizza, both generally low-risk options.) But let’s say you’re one of the people who loves roller coasters. Does this mean you want roller coasters 24/7? What if you had to ride the roller coaster every day, from the time the park opened to the time the park closed, with just a few times a day that you could take a break on the merry-go-round? If that doesn’t sound like the time of your life, you may want to reevaluate starting a business.

Entrepreneurship is the ultimate roller coaster, unlike any you have ever seen before. First, you have to use your own money to build or buy the roller coaster, and even though you are helping to build it, you can’t fully see what it looks like before you get to ride it. You don’t know where the turns, loops, and drops are, or how many there will be. Then, you have to wait in a really long line to get on the roller coaster. Once you are on, you have to buckle up for a crazy ride. There is exhilaration, and there is fear. There are places when nothing is happening and places that induce sheer panic. No matter how well it is built, it will likely break down somewhere along the ride, leaving you stuck and hoping that it will get fixed and you will get out unscathed. Not to mention that this is the world’s longest ride and that once you get on, you can’t just climb off halfway through.

High Highs and Low Lows

Many new businesses have what is called a “honeymoon period.” As you can guess, this is the beginning of the business’s history when everything goes well. The honeymoon period typically lasts for the first several months (and sometimes a full year or longer) after opening, when, because it is the new thing, the company gets a lot of business. The honeymoon period is common in the restaurant industry. This is because when a new restaurant comes to town, everyone wants to check it out. A new restaurant opens and is often immediately packed. However, once those people who only wanted to check out the new restaurant have gotten their “shiny new thing” fix, they don’t come back. Then, the restaurant’s patronage levels off to a normalized state of business.

A couple of years ago, there was a new restaurant built less than a mile from my home that had everyone buzzing for months. From the first day it opened, it had two-and-a-half-hour waits. Even if you made a reservation (which you needed to make two weeks in advance) it could take thirty minutes to get seated. Every person within a ten-mile radius of the restaurant wanted to be among the first to try it out. However, the food was mediocre, the prices were high, and the service was average at best, so a lot of people never went back. After the first six months, the restaurant had quieted down. (That’s not to say that the business won’t revise its concept at some point and build its client base again; the point is that it started like gangbusters due to the honeymoon period and then leveled off.)

This is why most large restaurant chains won’t include a new restaurant in their “same-store sales” calculation (which calculates the growth or decline in the average sales at all restaurants on a yearly basis) until at least twelve to eighteen months after a restaurant opens and the restaurant patronage returns to a normal, more predictable level. They know the brisk sales—the honeymoon period—made after the opening of a restaurant skew the reality of the normal average sales at that unit.

The honeymoon period can cause some crazy highs and lows for you and your business. Take, for example, Marty and Joe (names changed), who were colleagues at a prestigious advertising firm. They were getting sick of corporate office politics, and because they were both client relationship managers, they felt that, hey, since they had brought in the clients, they shouldn’t have to give up so much of the fees. If they had their own firm, they could capture all of the client fees and be the BMOCs.

They had been courting a few potential clients who were evaluating new advertising firms for new media business. I am not commenting on the ethics of this, but Joe and Marty tested the waters to see if these clients would sign with them if they left their existing firm to start a new company. Either they didn’t have non-compete agreements with their old employer, or they were too dumb or ballsy to worry about getting sued; I didn’t ask. Either way, what happened was that a few prospects agreed that if Joe and Marty started a new company (let’s call it “Newco”) then they would give some of their advertising work to Newco.

That was all the juice Marty and Joe needed. They didn’t want to leave their high-paying advertising jobs until they were sure that they would have clients for Newco. Those potential clients made good on their promises, and Marty and Joe booked almost $600,000 worth of business during that first year. After expenses, they took home a tidy profit for the year and felt they had a great base upon which to grow the business. They were on cloud nine. They had a great honeymoon period with an initial push of great clients.

Marty and Joe were flying high; they were the best of friends, were doing well, and believed that the world was their oyster. However, they didn’t realize that what they had experienced in year one was that honeymoon period. When year two came, the honeymoon was over.

To say that year two wasn’t what they expected would be a bit of an understatement. They started to call on new client prospects in an effort to build their business. However, the prospects weren’t as impressed with their client list as Marty and Joe had expected. Then, the worst-case scenario occurred. Within a three-week period, their two biggest clients (which had accounted for most of Newco’s revenue in year one) had management changes. One client brought a new CEO on board who decided the company should bring their new media division in-house and terminated the relationship with Newco. The second brought on a new director of marketing who decided that he preferred to have the prestige of a big-name firm as an advertising partner and also pulled the business from Newco. Without their biggest clients, Marty and Joe struggled to find projects for their second year.

The roller coaster went up, then down, and then hit a corkscrew. Marty and Joe began to fight constantly. They each blamed the other for the drop-off in business. Things were tense at the office. They terminated their one other employee, whom they could no longer afford to pay. At the end of year two, they had only made $70,000 in revenue for the entire year. After expenses, including rent, marketing, travel, and administrative costs, among others, they basically had no profits to show for their second year and nothing to take home in their pockets.

Joe decided he couldn’t take the ups and downs of running a business and left a few months into year three to go back to work at a larger agency. Marty kept going and a couple months into year three, he received a referral from a former colleague that ended up paying off in spades. The roller coaster was going back up again and by the end of year three, Marty had reinvigorated Newco (or so he thought) and had made about $265,000 in revenue. It was not as much as Newco made in year one, but since Marty no longer had a partner, he felt he was again on the upswing. He was once again in a good mood, enjoying the success of being out on his own.

However, roller coasters don’t go up indefinitely, and Marty’s roller coaster was no exception. In year four, Newco’s sales contracted again to less than $100,000 for the year. After expenses, Marty’s profit didn’t justify the risks or the hours he was working. After all of the ups and downs, Marty could no longer take the instability and closed Newco. Marty tried to return to a large advertising firm, and it took him about nine months to find employment because potential employers were worried that he was used to being the BMOC and wouldn’t be able or willing to work in the corporate hierarchy anymore.

The Reverse Honeymoon

While some businesses benefit from a honeymoon period, other businesses endure a reverse honeymoon period. Nobody knows that the new business exists, so it takes a good deal of time to build the business. The business may go through months of virtual nothingness. It may take months and months to get through a sales cycle and gain momentum. This can be emotionally devastating, as the business is so slow in the beginning that you wonder if you will ever gain any real traction.

While a honeymoon or reverse honeymoon period can create ups and downs, a variety of other factors can also create a roller-coaster ride for businesses. This includes factors ranging from having a novelty product, to making a bad acquisition, to competition moving very quickly. This means that even if you execute very well for a period of time and you are worth a bunch of money on paper, you still may not benefit from the upside or reap any of the financial benefits of your business by the time you are able to extract money from the business.

I have seen this happen many times. For example, take the five-year-old consumer products company that one of my colleagues worked with that was worth $100 million a year ago and, due to mismanagement, has no equity value today. The entrepreneurs behind it thought they had hit the big time, but given that all of the money generated by the business has been used to grow it, they probably won’t see a penny from their investment or hard work.

There is another hybrid product and service company that I have done some work with that has been in business for nearly ten years but is now losing money (and the bank is requiring a personal guarantee from the entrepreneur to keep the business afloat). Unfortunately, this is not an uncommon situation; I could name two dozen other similar examples without much thought.

Even when an opportunity is significant, because of the amount of capital required to be reinvested in the business to help it grow or the requirements of the other investors in the business, sometimes the business isn’t worth much by the time an entrepreneur would realistically be able to liquidate some or all of his equity. With increasing competition, this situation will likely become even more prevalent over the next several decades.

Financial ups and downs are not the only rollercoaster-esque aspects of business. There are all kinds of other fun things that happen which create drama and highs and lows during running the business. From your warehouse being destroyed (this almost put Build-A-Bear Workshop out of business early in the company’s history), to hiring employees that quit unexpectedly, to having your computer systems crash and losing valuable data, there are many issues that pop up that will make you sad, angry, or frantic. Sometimes, problems follow something great. For example, you get a huge order from a major retail chain (a major high), only to find out your suppliers can’t help you fulfill it in time and you blew your big chance (a major low). Highs and lows are just part of the roller-coaster ride.

The aforementioned are just a few of the many examples of the various surprises, highs and lows that you will face. While you will enjoy the good ones, the bad ones will seem even worse given all you have at stake. It also creates a system of questionable balance as you swing from the highest high to the lowest low. If you are a person who appreciates having control—which ironically is what many aspiring entrepreneurs cite as a main reason to start a business—the roller-coaster ride of a new business may make you insane, or at least emotionally and mentally exhausted.

Achieving balance and finding time for work, friends, family, health, exercise, and leisure time is hard. Remember that balance and the roller coaster are often not compatible.