Failure Is An Option, Actually

For every successful business I’ve started, or investment I’ve made, there have been multiple failures: businesses that never took off, investments that went to zero, and times when I was super gung-ho about something, only to have it end up in my Bad Idea Hall of Fame. Want to know more? Let’s take an honest trip down memory lane.

THE KICKOFF

The first one that comes to mind takes me back to my college years, when I was about 20. I was still in school at the time, and really into kickboxing, which was just becoming popular, with studios popping up everywhere. One day, I had a lightbulb moment for how I could monetize the kickboxing trend.??

I bought the domain name Kickboxing.net with the plan of building an online directory of kickboxing studios. To fill out the front end of the site, I put up a bunch of content around the sport, but that was the easy part. The more labor-intensive work was creating the software that would pull information from a database about different locations. During my limited free time, I programmed the whole thing, spending probably about four months on it.?

Then it was time to reach out to my potential customers. For that, I went to the Yellow Pages. Yes, the actual, physical Yellow Pages - at that time, they were still relevant! And I needed them so I could find mailing addresses to send out my sales pitch via snail mail. Email was still very new, and it was often impossible to even find an email address for a company, so the only way forward was to send them a flier, the old-fashioned way.

It took me another two months to create a spreadsheet of hundreds of kickboxing studios all over the country, and to get postage, paper, envelopes - the whole deal. It all probably cost five or six hundred dollars, which was a lot for me back then. My flier advertised Kickboxing.net as a online, subscription-based directory that studios could join for $100 a month, or more if they wanted to upgrade their listing. With fingers crossed, I sent out the flyers.?

After another two months, I got (drum roll, please) one check. For one hundred bucks.?

Yes, one random studio in Oregon liked my flier, and sent a reply saying that they were willing to try out the service for one month.?

Well, Kickboxing.net was clearly not going to turn out quite like I had hoped, but I didn’t give up right away. After all, I had the site, the software, and a huge database of studios made into spreadsheets. So I pivoted from? the subscription idea and made the directory anyway, with the idea of making money from Google AdWords.?

It was an improvement, I guess you could say. Kickboxing.net went from making no money at all to pulling in about fifteen dollars each month.?

So, after about a year or so, I shut down the site and moved on. It was my first taste of real failure.

THE (TOO) EARLY BIRD

Then there was Offyx. Before SaaS as a business model burst onto the scene and became ubiquitous, I partnered with friends to pioneer a suite of office software that users could pay for monthly as needed. It all worked via the Internet, rather than having to be installed locally, which was a huge innovation at that time.

I spent two years of my life doing that. Building a product, building a business, and finding investors. It was the big boom of the dot-coms, and a lot of people were very interested in investing in tech startups like Offyx, so things actually took off. We found ourselves opening an office on Fifth Avenue, and it seemed that Offyx was poised for big, big success.

But the dot-com boom was quickly swallowed by a dot-com crash. In all of the fallout, Offyx went under, like so many other digital startups. I was actually the first one to leave - everyone else wanted to stay - but I had seen the writing on the wall, and I knew that there was no way. We were never going to recover.?

In spite of a great, innovative idea, solid technology, and great investors, Offyx had one fatal flaw: it arrived in the world too early. To make it really viable, we needed broadband penetration that just wasn’t there, and we needed customers who saw the value in paying by the month or as they needed the software - but users weren’t on board with that yet. They were still totally in the mode of buying a CD-ROM of the latest software and installing it on their desktop.

As for me, I had already spent too much time and money in Offyx to keep going to the bitter end. All of my savings had gone into the business, and that was no small amount: it was something like $85,000, money that I had earned through programming on the side during college, and I lost it all. That was the biggest failure I ever had, because it went from this huge high of raising millions of dollars and thinking that we were going to become dot-com legends, to going to pretty much zero.?

But I learned a lot from it. I learned how to build a product, how to build a team, how to do accounting, and a little bit about sales. Most of all, I learned how to run a company. Because despite the bust, Offyx was a good company. It didn’t suffer from being ill-managed or having a bad product; it really was a matter of circumstance. So the takeaways from it were solid, and helped me a lot in my future work at JoonBug and EZ Texting.?

SHORTCODE SHORTFALL

Speaking of which, the next failure actually happened during my time building EZ Texting. At EZ Texting, we used what were called short codes, which were 5 or 6-digit phone numbers that allowed you to send text messages to people through programmatic means.?

Interestingly, back then there were two different types of SMS: standard rate, which were the texts that you got or sent normally from your phone, and “premium” SMS, which allowed users to sign up for content like weather reports, horoscopes, and sports scores to be sent to their phone via text.

For example, a person might text the word “weather” to a shortcode like 515151, to sign up for weather texts every morning. They would receive those texts, and then the carrier would bill them on their monthly phone bill. It was usually some small amount like $3.99. The carrier, such as AT&T or Verizon, would then split that amount with the company providing the premium SMS messages.

There were a lot of people back then who were making a ton of money doing premium SMS content. Some of these people were literally making millions of dollars a day. There were shady companies scamming people into signing up without being aware of it - this was called “cramming.” But there were also legitimate premium SMS content creators raking in money with happy customers. During the EZ Texting years, I noticed that, and I had an idea.

My idea was to create a texting service called FanText, which would allow celebrities to text premium content to their subscribers. Social media was beginning to take shape, and it was so new and interesting to see celebrities on platforms like Twitter, sharing what amounted to premium content for free!

With FanText, my plan was to allow users to text the name of a celebrity - say, Britney Spears - to a shortcode, which would subscribe them to that celebrity’s texts for perhaps $9.99 a month. They would get exclusive Britney Spears content, and the monthly subscription fee would be split between the celebrity, the carrier, and EZ Texting.

Keep in mind, this was 2006 or 2007, very early in the game. In fact, it was a little too early. So again, as with Offyx, I was stuck doing something that people would eventually want, but which no one wanted right then!

Unaware of this, I invested huge amounts of time and money getting the shortcode, getting approvals, and building out the actual software. In the end I created this whole complex system of registering the celebrity’s phone number, and setting things up so that users would text the shortcode to subscribe, while celebrities would text the shortcode to distribute content.

Next, I found some celebrity wranglers and some PR people, and started pushing to get these celebrities on board. To say that I got an underwhelming response is putting it nicely. None of them wanted to do it. Every person I talked to said something along the lines of:

a) no one’s going to pay,?

b) we don’t want to spend a bunch of extra time doing this texting thing, and?

c) who are you??

Trying to persuade them was complicated by the fact that I didn’t have an actual customer or case study to show them how it could be done, which is a classic startup conundrum. And because social media was still very new, no one understood the power and potential of it, even from that angle. I had made that connection, and tried to monetize it, but it was no good. A year (and almost a hundred thousand dollars) later, I shut down the program. They say timing is everything, and in the case of tech, it’s definitely true. You can have everything in your favor, but if the timing is off, it’s just not going to work. Eighteen years after FanText, another company took a shot at the exact same business idea - celebrities texting fans exclusive content via shortcode. Community is the name of the company, and although it was plagued early on by accusations of cramming (!) it eventually attracted public figures from Jennifer Lopez to Paul McCartney to Barack Obama! That’s the breaks.

THE CONDO CONUNDRUM

Right after the sale of EZ Texting, I bought a beautiful penthouse apartment in Chelsea. This was just a few years after I got married, and it was basically our dream apartment. When we bought it, the market was scorching hot, so I immediately started getting offers for it from all sides.?

Fast-forward about one year, and we had decided to move to Miami, but we still didn’t want to sell the apartment. I decided that keeping the apartment would be the smart move, and then we could live in New York and Miami half and half (although with one thing and another, we never ended up actually doing that).?

Still, I kept getting offers, and the prices in New York continued to climb. Each offer was for much more than I had paid for the apartment, and I told myself, I’m never gonna sell this place! It’s gonna be worth so much money, an amazing asset, all that kind of thing.

But you make your plans, and then everything changes. Within a few years, the condo market in NYC turned down significantly. There were a lot of new condos out there, and the price of older condos came down. Then there was a recession, and the New York market was just not coming back. And then COVID hit, which made it even worse. The result was that I ended up having to carry this apartment essentially for an entire year. I did rent it at times, but as most landlords will tell you, renters with luxury apartments just end up ruining your place, and you pay more to fix everything than you gained from renting. That, along with the middle-of-the-night phone calls, dealing with condo boards, and downtime between tenants makes the whole situation a giant pain in the ass.

Looking back, had I sold it when we first moved I would have made a very big profit. By the time I did sell it, I lost close to 25% of my initial investment, which was a really really big number for me. Maybe not for other people, but for me it was a very big number! But you live and learn. The main thing I learned from that experience is that it’s very hard to make money on the place where you live, unless you’re willing to actually live in it and stay in it for a very long time!?

REAL ESTATE RUNAROUND

I made a number of other investment missteps in New York, although overall I had a lot of luck there. My first investment was when I was 22, right out of college: I bought my first apartment, located at 230 Central Park South. It was a co-op that I paid about $200,000 for. After fixing it up and living in it for a bit, I flipped it for $300,000. I thought I was a genius!

Now I realize that if I had held on to it longer, it would probably have sold for millions of dollars, being in one of the most coveted locations in New York. But real estate can be like that. It’s a little bit of skill, a lot of luck, and you can easily become over-confident. That one was not the best investment, but some of my other NYC investments were absolute failures, even recently. One of them that really stands out was a condo building that was being built at 277 Fifth Avenue, by a well known developer named Moshe Shuster. This was in 2015 or 16, during the condo boom in New York City; there was very little inventory, everyone wanted to buy, prices were high, and those in the know thought the prices would continue to go up (just like I had thought about my apartment!).?

A broker friend of mine who knew Moshe Shuster approached me, saying, “Look, they’re going to build a 60-story building there!” He showed me all of the photos and renderings, and it looked great. The firm had lofty ideas of how much each condo would sell for, and the penthouse was priced at 50 million dollars.?

I visited the site, which happened to be an area I knew pretty well because our Offyx offices were close by, back in the day. The location seemed great, not far from the Empire State building, and after mulling it over for a while I decided to do a pretty big investment there.

Well, a few years went by, and the project still wasn’t done. Things got delayed, and even though the developer had a great reputation and had done this a couple of times before, somehow one thing led to another and the completion date was repeatedly stalled and pushed back.?

At the same time, the dynamics of the city itself were changing. Interest rates weren’t what they had been, the economy went through a lull, the whole housing situation changed. And when the condo building was finally ready to go, prices had dropped. Hard.

They couldn’t sell the condos at the prices they needed to, and they had a lot of debt to handle. To top it off, in the midst of all this chaos, COVID hit.?

Meanwhile, Shuster’s firm needed more money, but no one wanted to give them any more money because no one really believed they could pull it off at this point. And yet the project still had to be concluded, so they brought in another investor, someone who could give them “pref equity.”?

“Pref equity” which is short for preference equity, means that the investor came in and gave them money on the condition that they would get paid back a certain amount guaranteed, and get paid first. Every other investor would be paid with what was left over, if they got paid at all.

Some time later, Shuster’s team had sold a bunch of the condos, but the way the math worked out, it was clear that there was no way to make enough money with the remaining units to have anything left over, once they paid the pref equity investor.

So essentially, my whole entire investment (and a lot of other people’s, too) had gone to zero. That’s something a lot of people don’t know about real estate. They think, hey, it’s a piece of actual real estate. It can’t go to zero. But in fact, there are situations that you can get into where it can absolutely go to zero. In fact, if you have debt, it can even go negative and you can end up owing money! Some things just don’t work out, even when they seem like golden opportunities.

THE DUMBO DEBACLE

A few years after that, another investment came my way through someone I had done a number of good deals with. It was the “Watchtower” in DUMBO (Down Under the Manhattan Bridge Overpass, yes, you read that right). DUMBO is a super-trendy part of the city, near the water with a view of the Manhattan skyline. Lots of restaurants, boutiques, art, and things like that. The watchtower building is a huge building that had previously been owned by the Jehovah’s Witnesses, but now it was on the market, which was a very exciting business opportunity.

The group dealing with the property was called CIM Group. I had done a lot of business with them before, and they were very successful. So going into this project, I was performance-biased, hindsight-biased… I really thought they could make a success out of this project, too.

CIM Group joined forces with Jared Kushner to buy the watchtower building, and then they brought in investors. They had come up with what seemed like a great idea to turn the building into offices that would draw tech companies and other businesses. It was the right place, the right time, the right people, and basically a great-sounding plan.?

But things don’t always go as planned, of course, and not long into the project, they realized that they had to get Jared Kushner out. It seemed that no one wanted to do business with him because of Trump, so that was the first issue that came up. But they handled it, he got out, and the project proceeded.

Next, they were going to master-lease it to WeWork, which was (and is) an office subleasing company with an almost cult-like following, championing flexible workspaces and all that kind of thing. About a week before they were due to sign, the “WeWork implosion” happened: a notorious fall from grace, right as the company was planning to go public, complete with the company’s CEO leaving and the IPO falling apart.?

This left CIM Group having to scramble and pivot yet again. It took another year to find a few new tenants that were big enough to take on the huge space. Just as they were trying to sign with these new tenants, COVID hit.

Another huge setback, another struggle to figure out where to go from there. The money was running out, and suddenly no one in New York City even wanted an office. If you look at the numbers right now, they still have less than 50% occupancy.?

No one could have imagined that things would turn out that way. It was a true black swan event. Office space was usually really coveted, especially in new, trendy areas that tech companies and new companies could attract talent to. So CIM Group did what’s called a capital call, where they call all of their investors and try to get everyone to put more money into the project. They wanted everyone to basically double their investment. But no one was biting.

CIM Group did what Shuster did, and found another investor to pump more money into the project. As of now, the new and improved watchtower building is still sitting empty. I don’t know what’s going to happen, but the odds are that this thing is pretty much going to zero, or else will return a fraction of the investment back seven or eight years later, which is unfortunate.

So there you go again - the elements of having the best location, the smartest people, the hottest type of asset that you can imagine for the area… and it still flops! It’s just the nature of the beast. Sometimes what looks like a total home run turns out to be a big, big failure.

TROUBLE IN TENNESSEE

On a smaller (but somewhat funnier) scale, house-flipping became a big thing just prior to COVID, and I ended up throwing my hat into that ring. The housing market for both rentals and homes for sale was getting pretty hot all over the country, and people started to realize that there were buy-it-fix-it-flip-it homes everywhere.

A really good friend of mine, one of my best friends, gave me a call one day about doing just that. He lived in New York but was originally from Tennessee, and while visiting home he had stumbled across a house in a great location that just needed some TLC.

Now he was back in New York, and I was in Miami. But we didn’t want to miss out on the investment, so we decided to buy the house anyway, and hire a contractor to do the fixing up. Then we would flip it and share the profits. We scouted around and found a contractor located in Tennessee with a great reputation, hired him, paid him, and… that was a bad decision.

As far as I know, he showed up to the property one time. And that was it. He was gone, our money was gone, and the house was just sitting there with no one to do the work!?

After failing to get this guy on the phone, my friend actually made another trip to Tennessee to resolve the situation, showing up at the contractor’s house to get some answers - but the contractor’s wife just slammed the door in his face! We had to admit that our great idea had flopped, and ended up just selling the house at a small loss and moving on.?

PITTSBURGH PROBLEMS

Another property investment that went south for me was a garage in Pittsburgh. I had bought the property with a good expectation of profit, even though it only had two tenants and a large parking lot. The reason was that some hotels were slated to be built on the same block, and the city was planning to move some offices there as well.?

So I had this grand idea that we would fill up the property with city offices, and the hotels would get parking from us, and it would be a great deal for everyone.

As you can guess, that didn’t ever materialize. The hotels got delayed, the city got delayed, COVID happened and just annihilated all office space and parking needs because no one was coming into the city anymore… we even got into a situation where the tenants we did have weren't paying. So we had to work out something with them, and eventually just fire-sale the place.?

It was crazy - we had bought it at a bargain price, but we had to sell it for even less than that, and it took forever because nobody wanted it. Nobody. Looking back, it was good luck for me that someone finally did buy it early in the cycle after COVID, because a lot of people thought that everyone would come back to the office, which still has not actually happened. So whoever bought it is now most likely in the same kind of situation that I was in when I sold it!

GOLD MINES AND MEME STOCKS

Of all the investment news over the past few years, one of the strangest things to happen was the meme stock craze. AMC, GameStop, and all of these other companies that really weren’t performing were suddenly worth tons of money because people were trading them on Robinhood and causing prices to go up. There were all kinds of things going on there, but I was skeptical and decided not to get mixed up with it.

My attention had turned to an investment opportunity that seemed like the opposite end of the spectrum: a literal gold-mining company with a literal gold mine, which I found through a buddy of mine. The company is called Hycroft Mining Company, and after doing some digging (sorry not sorry) I did kind of get sucked in, investing a good amount of money into it.?

It all sounded great on paper. We had a few calls with the CEO, who explained to us that they were creating a new methodology of mining that would allow them to extract more gold out of their current mines, as well as other minerals and precious metals. She had a whole presentation and spoke to us several times, but we also sought out information from engineers and other experts who could (hopefully) tell us if the company’s plan sounded plausible. They basically validated what the CEO had said. To top it off, Hycroft’s investor table featured some big funds and people who had already been successful in the industry. It seemed like a sure thing. So I decided to take a large position. It was early on, and the stock seemed to do fairly well at first. And I thought, “This looks good, but maybe I should get out now.” But there was enthusiasm in the air about stocks right then - meme stocks, crypto, all of that, and it kind of bled over so that I found myself thinking, “No, I’m going to hold on! This thing is going to the moon!”?

None of what they tried to do actually came to fruition.?

Hycroft ended up having a bunch of setbacks. Then they ran out of money, so they needed to issue more shares to get more money, the typical downward spiral. It was another investment turned sour, with all of the usual solutions and non-solutions being tossed around.

But what was crazy is that somehow, and I have no idea how this happened, meme stocks did find their way into my thoroughly-researched gold mine investment! Of all things, AMC, the original meme stock, decided to invest a bunch of money into Hycroft mining too. So they pumped in some additional funding, the stock popped temporarily, and then continued to diminish. It wasn’t enough to recover the losses.

Now the investment is a worthless write-off for me. But it was a crazy ride. I thought I was being smart by not getting caught up with meme stocks and following the crowd, by investing in a company that creates a physical product (gold), with all the pedigree that you could want.?

LET’S HAVE A CHAT(BOT)

One of my most recent business losses was a company I started just a few years ago, called 411Rx. I started it with a business partner of mine, Aly, whom I had met back in the EZ Texting days. He was the guy I found online when I was trying to get started with shortcodes in the U.S., who was able to help me navigate the process and bring the idea to reality. Since then, we’ve had a long business relationship with various deals and investments, and a couple of years back, we were looking for another business to start together in the mobile space.

At that time, the big thing in Android technology was RCS. It was going to be Android’s answer to iMessage on iPhones, because Android’s text messaging was very simple, without the rich features that iPhone has.? RCS would change all of that, and it was going to have something called a chat directory, which would show up on most Android phones. In your text messages, there would be a directory icon in the upper right or left corner, that would allow you to message with businesses in a secure manner. So for example, if you had a bank account with Bank of America, you could securely text with a Bank of America chatbot, which meant instant customer service.

Aly and I were thinking about the possibilities with this chatbot service. There were only a few businesses in the directory, and it was only rolled out to a few handset models in the US.? We were thinking of other kinds of chatbots that might be useful. And one that we thought of was inspired by a company called GoodRx, which was taking off right around then.

GoodRx gives you coupons for your prescription medications, regardless of whether you have insurance or not. And it became popular, because all of the pharmacies accepted these coupons.? People were getting great deals on their medications and the company made money on each coupon that was redeemed by the pharmaceutical companies.

Our idea was that, instead of going on a website or app to find out if you could get a coupon, users could use an RCS chatbot. You could tell it what kind of medicine you needed, what strength, what quantity, and various things like that. And the chatbot would show you the available coupons, which you could then download to your phone and present to your pharmacist.

The name we came up with, 411Rx, was a reference to calling 411 for information, but also a strategy - the chat directory was alphabetical, so having a company name that started with a number would bump our chatbot to the top of the list.

I got to work with Aly, creating a prototype and interface and hiring programmers offshore to develop it and enable it to do all of the things we needed it to do. The process took a few months, and a whole bunch of money - we spent tens of thousands of dollars doing it. Then we deployed, tested, and got it approved by all of the carriers and Google (which took even more time, money, and paperwork).?

Then we just waited. And waited. And waited. Because the full launch of RCS across the whole Android ecosystem had yet to actually roll out.

In the end, it just never happened. It was like Waiting for Godot! We would ask for updates, and we would be told it was coming soon, but nothing seemed to come of it. RCS only ended up on just a few more handsets in the U.S., but not anywhere close enough to make it worth it for 411Rx. We hung around for the next couple of years, maintaining the system, which cost even more money. But eventually we had to give up, and accept that they might never actually deploy this solution, or at least not for a long time. Too long for us to keep floating the business on our own dime.

PLAYING TO WIN AND LOSE

So there you have it, just a fraction of all the failures that I have had! Thank God, the successes have outweighed the losses overall. But one reason for that is this: I have never taken a bet where I’m all in, or where I could have a truly catastrophic loss.?

And I think that’s the key to handling the ups and downs of startups and investing: size your bets correctly. You need to play to win, obviously. Take risks that have a sizable payoff, something that will be meaningful and actually make a difference if you succeed. But equally important, or maybe even more important, is to make sure that if you lose, you aren’t completely wiped out - you can still come back and play again.