Tough lessons learned through a venture gone sour

November 6, 2011

Street smarts account for probably 75 percent of my business’ success. I have a graduate degree in public administration with a specialization in statistics, an undergraduate degree in journalism from one of the top J-schools in the country and I am very proficient technically at what I do.

But there is no business course that teaches you how to know what will sell and not sell to either the masses or a targeted market. There is some trial and error in that, and the only art that I’ve learned is that you have to float the balloon up sometimes and just see if something works. There is no textbook that can tell me how I need to price my products or services, and whether the timing is right for a new direct mail campaign.

My main business is to work with public school districts to analyze their enrollment as a demographic consultant. Just like the craftsman who makes cowboy boots or hundreds of other specialized experts, there are few college curriculums that can prepare one for a career like I have. That isn’t to discount the logic skills and research techniques that I learned in graduate school, because I use those daily to perform my analysis for my clients. But I have to have the “street smarts” of knowing how to price my services, how much time to devote to a project before it becomes unprofitable and how to budget my cash-flow until the school districts pay.

Sometimes the trial balloon has gone flat for me. Five years ago, it appeared that public school districts would want a higher level of accountability of teachers in relation to student performance. President Obama has articulated many times that same mantra. So I invested more than $100,000 to build an online data application that would import raw student test score data for five years, link that data to teachers, and then develop trend data showing test results for teachers and their students.

Sounds like a reasonable idea, right? The first year our sales were good and we actually recovered our investment after much work. The second year sales weakened. By the third year, sales had stopped. Even though the product worked, apparently school districts really didn’t want to know which students under which teacher were performing well and which were not. As long as there was no clear linkage between student test performance and teacher salaries, teachers didn’t use the application. So we were stuck with a good idea and no market.

Last fall we killed the product and stopped our sales of it. Either we were ahead of our time or had produced something that would never sell.

The idea behind the startup business was to offer something new to my core clients — public school districts — but in a different form. I correctly reasoned that the school districts that would buy the teacher performance application would have never considered buying our demographic analysis services. (Any small business owner should be thinking about how to branch out the core business just a bit to tap into a new market.) I have to admit, however, that when the dust settled, the profit from my startup was minuscule in comparison to the number of hours it took to launch and maintain the effort. My core business probably suffered from the distraction of the off-shoot, and if I had put $100K in my core business services, we’d probably be in a stronger competitive position today.

What I learned from the effort to try to diversify my business, and then ultimately killing the startup, is that there is a pile of pain, pressure and heartburn to try to recover the costs. I was rolling the dice with $100K on the table, betting that I could make that back. Anybody who has been on the hook with a bank loan, your mother’s nest egg or even pledging your house and car for collateral has been there.

Five years ago was a different economy and I believed that the investment was worth the risk. I sure don’t think that today and have decided to hunker down and save all the profits that I can, to weather the storms that I think are still ahead for the next 12 to 18 months.

School smarts says: The recession is over and there are green shoots of improvement all around. But my street smarts tell me that the mood is just too dark among public school districts, which are still laying off teachers and reducing costs, to see if they’ll open their wallets for my firm. I suppose as long as I hold that thought then the self-fulfilling philosophy actually comes true.

Preston Smith is principal owner of Business Information Services, LLC, a Blue Springs, Mo.-based firm that provides demographic services to school districts.

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