Partnerships – Part 3
I am not a big fan of partnerships. I know many big companies (Apple, Google, etc.) have been built that way, but it has never worked out very well for me. Many people don’t like partnerships because of potential personality conflicts or business decision making conflicts that come up and eventually ruin things, or because they don’t want to give up control of the business. But, those were not the problems I had. Almost every time, the problems I had came down to money.
Not all partnerships are the same of course, and what I have done may not represent typical partnerships, but for what it is worth here is a summary of the partnerships I have been involved in over the past 15 years:
1. Adoptme.com – As I wrote about at http://www.impulsecorp.com/partnerships and
http://www.impulsecorp.com/partnerships-part-2, I started the Adoptme.com website myself but several years later did a partnership to sell Webkinz type plush toys based on the Adoptme.com characters. This was before Webkinz was around, so there was no competition. After several years, we finally got the toys sold in stores, but they did not sell well enough to make it worth staying in business, so we closed the toy division and I bought back the Adoptme.com website. In the end, I lost around $62,000, plus several years worth of time and effort working on it. The biggest problem was that my partners (some business friends of mine) took several years longer than expected to launch the toys and ran out of money, so I either had to finance them or scrap the project before we ever launched it, so I was pushed into financing it. I am still glad I did all of this though because it is not something I would have ever done by myself, and as evidenced by the huge success of Webkinz, it was a great idea.
2. FindRentals.com – In 2001 I was approached by a business associate who wanted to start a vacation rentals website using my FindRentals.com domain name, which I was not using at the time. I made a deal with him where I contributed the domain and handled setting up the website and the hosting, and he did all the sales and handled the business end of it. Everything went pretty well, where I got the site setup and he sold a bunch of listings, and it has grown year after year, at one point with a staff of around 25 people (many of them salespeople paid on commission). The site is a success, but I have not made any money from it so far. In the 9 years since we started FindRentals.com, I paid over $100,000 to my programmer to do work on it, plus monthly fees to the webhost, and I personally spent a huge amount of time working on it. I spent more time on FindRentals.com than any of my own sites, other than maybe Bored.com. The problem is that there is never any “extra” money for me to get paid. The site is always just a month or two away from running out of money, and if there is any extra money it is always needed for something important. It looks like sometime in the next few months my partner is going to setup a payment plan to buy me out, where I hopefully will get back the cash I put into it over the next few years, but I will have no profit and nothing to compensate me for all the time I put into it. And, I will have lost the FindRentals.com domain name, which is probably worth in the $100,000 price range. So, I would have been much better off just holding the domain, doing nothing for 9 years, and then selling the domain for a big profit.
3. Cyberworx.com – I started this company in 1999 with a friend of the family, who is was entrepreneurial and tech savvy, but did not know much about the Internet. The goal was to create the types of online businesses I would never do myself, like ones that needed an office and had a lot of customer service and all the un-automated things that I hate doing. I try to keep things 100% virtual and as automated as possible. Initially we created some sites like a college textbook price comparison search engine and a site that showed what items local stores had on sale, but the problem was these sites were not making enough profit for my partner to live on (I already had my own business so I did not need to make anything from Cyberworx in order to survive). To keep things going, my partner requested that I loan money to the company to pay him a $3000/month salary so he did not have to shut things down and take another job. I agreed to do that under the hope that future revenue would cover that cost. Eventually more revenue started coming in (mainly from BargainPrinting.com, an online printing service) and he opened an office for the company and more websites were built, but the company still needed my $3000/month to cover expenses. I also cosigned the lease for their office space. Things grew even more and it got to the point where I was loaning the company $10,000/month to stay afloat or it would go out of business.
The main problem with this was that I was not looking to invest any money in anything. When I started the company with my partner, the whole point was that we would be 50/50 partners and I would contribute the technical/web part but it would not involve cash. Over time I loaned $190,000 to the company to keep it from going out of business, and almost all of this was money I borrowed from credit lines and credit cards, some with interest rates as high as 24%. So, in addition to that $190,000 I also paid another $50,000 – $75,000 in interest. To make things even worse, all of this was at the same time my own company had negative cash flow of $15,000 – $30,000/month, and even though my cash flow losses were temporary, I had no credit lines left to use to cover the losses because they were all used for my Cyberworx loans, so I came dangerously close to going out of business. To make up the cash shortage, I had to sell a bunch of domain names at cheap prices, that I did not want to sell, and which now would be worth hundreds of thousands of dollars. And, I had the $190,000 in credit card bills plus the huge minimum payments each month on that debt, which was not even really mine.
In addition to all of that, I spent a huge amount of time over the first few years helping my partner set up the Cyberworx.com websites and business. I spent just as much time on those projects than any one of my own sites. Imagine how much more money I would have mad had I spent that time buying more domains for myself or setting up my own sites.
None of the money I lent the Cyberworx led to me owning more of the company. I already owned 50% as a partner, the money was just a loan. The problem is that after 10 years I have never received any profits as a partner, and I received only around $5000 towards paying back the loan. Even though the company has averaged 7-15 employees for the past few years, there is never any money “left over” to pay me. Something always comes up that is more important. I understand not taking a profit as a partner, since since that is the risk I took getting involved, but I feel ripped off that no payments are being made to me on the $190,000 I lent the company. I did not lend this money as an investor or venture capitalist, I did it to keep the company from going under, and since it still in business after 10 years I would think they would find some way to make a monthly payment to me.
4. FindCash.com – In 1997 I had the idea to create a website for people to search and see if they were owed unclaimed money by the government. In the 1980s, I had some luck getting finders fees by locating people owed unclaimed money, so I had some experience in the business. Back in 1997 it was much harder and much more expensive to put a big database online, but I decided to give it a try. The problem was that the government mostly did not offer the data in electronic format to the public at the time, so I partnered with a guy who was selling CDROMS of this data. He knew nothing about websites, so I made a 50/50 deal with him where he provided me with the data and I handled the website and all the marketing and customer service.
I programmed the site in Cold Fusion and it cost around $1000/month for the hosting because the database was so big (now this can be done for $50/month). FindCash.com looks pretty much the same now as it did 10 years ago, and allows people to search for free to see if their name is on the list, but if they are, they need to pay $10 to find out how much they are owed and how to collect it. Over the years my partner and I have averaged a profit of around $1000 each. He lucked out, because he only had to collect new data once a year, and after a few years I was able to get much of the data myself once the sources converted to electronic format. So, he just sat back and collected the $1000 monthly checks I sent him.
It was not his fault that I did all the work, but I did a lot of work for the $1000/month that I made from it. Like with any ecommerce site, there was lots of customer service, fraud issues, server problems, database updates, search engine marketing, etc. Income had been steadily declining due to unclaimed money data being more readily available to the public for free, so last year I bought him out and changed the site so that after people do a free search, it shows them Google ads for other unclaimed money sites instead of allowing them to pay $10 to signup for mine. I now make just as much profit this way, but I do almost no work to run the site. Overall I am glad I did this partnership, but had I had the money back in 1997, I would have been much better off paying my ex-partner a one time licensing fee instead of making him a partner and paying him over $100,000 in profits. But, I was broke and just starting my business so a partnership was my only realistic option.