The Good Fail: Entrepreneurial Lessons from the Rise and Fall of Microworkz

Preface

During the first 45 years of my life, I started 11 different businesses, contributed to hundreds of others, and stumbled vastly more than I succeeded. Whether it was creating custom bumper stickers for college students, shooting virtual tours of luxury hotels in Hawaii, or reinventing the distribution model for millions of computers, one thing has stayed completely consistent: I was never afraid of failure.

The definition of a Good Fail, as defined by yours truly, is a failure that has a learning value greater than the offset collateral damage. It is a failure that an entrepreneur is unlikely to repeat and one that will positively shape that person’s managerial and business acumen. In short, it’s a lesson from the hard knocks of the high stakes risks inherent in the pursuit of fame and fortune.

Of course, there are many different kinds of failures and, to be sure, they are not all created equal. I specialize, I hope, in intelligent failures—those that happen quickly and inexpensively and that contribute new critical ideas about your customers and/or business plan. These should be more than just grudgingly acceptable; they should be welcomed and embraced. Figuring out how to master this process of failing fast and failing cheaply and stumbling toward success is something companies have to get good at, and it is critically what has helped me avoid an even worse pummeling at the altar of business.

Getting good at failure, however, doesn’t mean creating anarchy or chaos out of the company. It means leaders, not just at weekly staff lunches, but also in the trenches, every day, who create an environment safe for taking risks and who share stories of their own mistakes. It means bringing in outsiders unattached to a project’s past. It means carving out time to honestly reflect on failure, not just success.

Perhaps most important, it means designing ways to measure performance that balance accountability with the freedom to make mistakes. People may fear failure, but they fear the consequences of it even more. It’s an unusual executive who can balance the performance culture with the learning culture and avoid deep conflict.

Companies need to remember this is a long-term game and one that is bound to have ups and downs. Downs are failures and ups are successes from the failures: It’s that simple. You really don’t need to hire a consultant to evaluate this because you’ve been doing this longer than you can imagine. Your first step upright as a very small child was preceded by hundreds of failures. I hope that you’re a little better at that ratio by now, but clearly the long-term goals don’t stop just because you trip over your own feet.

Few put it as well as Theodore Roosevelt when he said, Far better is it to dare mighty things, to win glorious triumphs, even though checkered by failure . . . than to rank with those poor spirits who neither enjoy nor suffer much, because they live in a gray twilight that knows not victory nor defeat. Perhaps this statement is slightly militaristic, but it aptly gets the point across about what all strong leaders embody. There are those who study, those who lecture, and those who execute what they are put on this earth to do. In my new version of rock-paper-scissors, execution always wins over study and lecture.

I have always viewed my business and personal losses as steps toward my eventual success and, although my road has been a painful one, it was a journey that has made me who I am today. Make no mistake about it; I am deeply embarrassed at some of the decisions I made and saddened by the people who I hurt along the way. With this book I hope that in some measure I can explain my thoughts, teach what is obvious, and mentor to the best of my ability anyone willing to invest the time to read. In truth, I believe failure is a requirement for success. Fortunately, you don’t need to fail as spectacularly as I did.

I have tried to remember all the events factually and, of course, present them in such a way that your experience with the story imparts the same wisdom I absorbed by living it. It’s amazing to me, looking back, that so many things happened so fast in the runup to the dot-com bust, but that was the way we lived. It’s funny, as I watch Silicon Valley today: Many of the same players are blowing a new web bubble as I write this, and almost as sure as can be, many good fails are about to happen.

Introduction

Your life is about to change, the menacing male voice on the other end of the phone warned me. I’ve just received notice that the attorney general’s office has commenced a formal action against you. Bye-bye. Then there was a click as the line went dead. I froze.

We had heard rumors for weeks that a consumer protection lawsuit would soon be filed, but with all the activity swirling at Microworkz at the time, my team and I just tried to focus on fixing our issues. The company’s growing profits were just over the horizon and everyone felt we were on the verge of greatness. If we could just catch up on all the orders we had received for our low-cost computers, all would be well.

In March 1999, we were the first company to break through the $300 price floor that existed when we announced our low-priced desktop computer line. As the media went wild, so did consumers, and the orders simply overwhelmed us. We thought it was a good thing to be so popular so fast. Looking back, clearly we could have used a little less fame and a little more experience. In addition to nearly overselling our debut $499 desktop, our follow-on $299 model was selling like hotcakes; we were already at work on our next product, the iToaster. There were a lot of moving parts to track, not to mention trying to manage on a scale that was foreign to me.

In the six months since the New York Times had done a story on us, we hired 213 employees on staff, but only 42 were administrative-level. That meant 171 workers were dedicated to production and shipping of our existing products and 42 were left to handle consumer complaints about the speed at which we were able to build and deliver the computer they had ordered; keeping the ravenous media at bay; complying with a Federal Trade Commission (FTC) audit; managing the Microsoft accounts related to becoming a licensee; complying with all the attorney general documentation requirements; and designing, engineering, and overseeing production of our iToaster Internet appliance prototype.

While we waited for the attorney general to complete her tedious audit and decide whether to sue us for failing to ship orders we had already taken, we fought the oncoming perfect storm. Job One was shipping all the computers Microworkz had promised to customers. At one point we had 50,000 computers on back order; our biggest concern was getting those computers built and out the door, not a shutdown notice from the state for the ones we hadn’t yet gotten to. But then came the phone call out of the blue from a Seattle Times reporter tipping me off that the lawsuit had indeed been filed. An hour later, the heavy envelope arrived, containing the paperwork I had dreaded but never truly believed would come.

I was in denial about the lawsuit because it seemed utterly ridiculous that the Washington state attorney general would bring charges against us, a small player in the huge computer assembly market. Sure, we were behind in some shipments, which we were working to correct, but there were several reasons an indictment seemed like overkill. However, I underestimated how ravenous she was to clamp down on any perceived misdeeds; she hoped to be elected the state’s new governor by leveraging a reputation as an enforcer. We were not the first small business to be targeted for shutdown in an effort to garner publicity, but, unlike others, we were transparent and cooperative. I was then, and still am, convinced her actions were motivated by ambition and perhaps loyalty to others.

Microworkz had been selling and shipping low-cost computers for months without any major issues. But when the media focused its attention on us, it was disastrous. We went from keeping up with demand on a very small scale to being totally overrun as we tried to build a company and deliver a sold product all at the same time. We ran out of RAM, as did virtually every other small computer manufacturer; commercial financing dried up; and customer support requests skyrocketed. Furthermore, we didn’t anticipate the amount of hand-holding our new crop of customers would require; we were used to tech-savvy computer buyers, not novice first-time owners. So, all at once, it seemed, we were hit from all sides.

The result was consumer complaints—and rightly so. Yes, in truth, we did have complaints from consumers nationwide about the delays on shipments, the product itself, or technical support issues. Of the approximately 42,000 orders we had received at that point, 113 had issues. Some customers were upset that it took much longer than expected to receive their computer. Some had never owned a computer before and had difficulty getting it up-and-running. Many ultimately returned their computers without ever having turned them on, they were so befuddled. Others were waiting for their refund, which was overdue, and others were waiting for Earthlink to initiate their Internet access. However, the percentage of complaints to complete satisfaction was miniscule, with small businesses, schools, and urban families being our biggest supporters.

Keep in mind, however, that the vast majority of customers with issues were not in the state of Washington. Statewide there were 17 complaints—yes, 17. That’s why the attorney general of the state of Washington had to craft her litigation as a consumer protection lawsuit and include all the complaints she received nationwide in order to have any kind of a case. She was grandstanding and stretching her jurisdiction to the limit. (It’s worth noting that while we were investigated by four other states and the Federal Trade Commission (FTC), no other agency chose to take any action against Microworkz.)

For some reason, she went after us with a vengeance. I was dazed, like after being in a car accident, after being served with the 50-page document. Yes, we had made mistakes, many of them mine—I don’t deny that—but at no point had we tried to hurt anyone or steal anyone’s money. It’s possible she recognized this, which is why a criminal action was never filed against the company.

Adjusting to the End

The next morning I realized it was really over.

I arrived at work around 7:00 a.m., rode the elevator to my office, sat down at my desk, and it hit me. I looked out my office window at the empty parking lot and realized it was quite possible that no one was coming to work that day. Why would they? I couldn’t guarantee them a paycheck if the attorney general was going to shut us down.

At that moment, I was overwhelmed with the knowledge that there likely was no way to fix the predicament I was now in, despite my successful track record of finding solutions to situations that appeared hopeless. Looking back, I might have been able to correct our mistakes months before, but on that day I knew I was stuck. There was no way out. I had never been here—feeling utter despair and loss of control. Unlike the hundreds of other impossible situations I had found myself in, I couldn’t talk my way out of this or negotiate a resolution. This problem just wasn’t going away.

I pulled out the Glock 9 mm I kept in my desk drawer for protection and placed it on the top of the desk. Everything I had worked for was going up in flames. It may have been the end of a company for my employees, but for me it was the end of my life. I was Microworkz, and I had expected it to be around to pay for my children’s education, for my retirement, for my employees’ retirement, and as my legacy. And now that was all evaporating. I wasn’t sure I could recover from this failure, or that I wanted to. I wondered if maybe that gun would be the answer to ending what would surely be a life of poverty, despair, and embarrassment.

The pain I was feeling wasn’t due solely to the loss of Microworkz, or any money I might have been told I was worth. It was due to the loss of a dream I had. My goal from the start had been to level the economic playing field by giving underprivileged kids access to the Internet. The pain I felt was due to the hurt we had caused our customers, those same people who could ill afford to lose even a few hundred dollars. What we were selling them wasn’t just a physical piece of machinery. It was a tool to help a child do his research paper for homework. It was the start of a new business. It was a connection to family members around the globe. I recognized what they would miss out on because we weren’t able to deliver what we had promised. It hurt then and it hurts now.

Not only had I failed to bring my dream to fruition, I had failed in a very public way. And thanks to the Internet, my kids would read about it forever. I didn’t think I could separate myself from a business failure this large, and the thought of starting all over was terrifying.

I ran through Microworkz’s