After some negotiating, UNFI ordered five hundred cases for their warehouse in New England, which was outside of the Big Geyser territory. It was a six-thousand-dollar sale. Not bad for a first order. They had dozens of distribution centers around the country and once again, I couldn’t keep my mind from doing the math of how that could quickly add up. Two months later, I got a check for a little over two thousand dollars and a two-page list of the deductions for retailer discounts, manufacturers’ charge backs, promotions, and damaged or unsellable product. I was beginning to realize Big Hal’s lesson would apply outside of New York as well.
Distributors weren’t the only ones playing for every advantage. Retailers had their own demands and schemes. They’d want a “free fill,” basically free cases to begin to carry Zico, and sometimes request “slotting fees,” basically cash in exchange for shelf space. Sometimes they’d take the liberty to discount the price of Zico and deduct the amount they’d pay me or the distributor (which would be charged back to me). Of course, no one ever paid us more if they decided to bump the price up, which happened often. We’d see 12-ounce cartons of Zico selling for $3.50 or $4.00 in some accounts when it was supposed to be at $1.99.
At the time I felt like the world was against me and that the cost of doing business might actually put me out of business. But looking back now I can see these businesses were doing what they needed to do to manage the hundreds, even thousands, of upstart brands and survive themselves. Further, these experiences were actually the cost of learning this business. So I had to understand the potential pitfalls and not fall into them, or at least not fall into them twice. My learning curve during those years was steep and very expensive, but the street-level knowledge I gained would be incredibly helpful when we grew and had dozens of employees managing as many distributors with millions of dollars in sales and expenses.
CASH IS KING
During business school I learned about cash flow, but I frankly didn’t really get it then. I would argue that it’s the single most important concept in business, especially for start-ups. Tracking weekly or monthly sales is important and fun, but a new business lives or dies by its ability to generate cash. In fact, one of the most common ways strong, growing early businesses falter is the failure to understand and manage cash flow. If sales are growing quickly but you get paid in thirty or sixty or ninety days, how do you keep up with ordering or producing more product? That often creates a cash crisis for many growing businesses.
I’d started to grasp cash flow by running International Paper’s businesses in Latin America, where I had to generate cash in each stand-alone foreign business to pay dividends at the end of the year. But those businesses were mature, profitable, slow growing, and I had a team of finance and operations people to manage all the details.
Zico’s cash flow cycle, on the other hand, was like juggling knives. On the supply side, let’s say I ordered a full forty-foot container load of product, which was the most economical unit to produce and ship from Brazil. The cost of those 5,500 cases was roughly $22,000. Add on shipping and importation charges, call it $25,000 to have it sitting in our New Jersey warehouse. I needed to pay Amacoco 50 percent up front when I placed an order so they could buy the packaging and the next crop of coconuts. A month after that, they’d put my order into production and then wait ten days to make sure the product had no microbiological issues. They expected payment in full before it shipped out of their warehouses. A month after that, the cases would show up in a port in New Jersey where they could be held by customs for another two weeks. I never wanted to run out of product (especially given the risk of delays importing from Brazil), so I always wanted to have at least one month of inventory on hand. So those 5,500 cases would sit in the warehouse for a month while we sold product from the previous month. Then we would start to sell from this shipment. Big Geyser wanted to carry the least amount of inventory possible, so they would order small amounts twice a week; same with Amazon.
Our customers agreed to pay us thirty days from when they received the product, but we were lucky to get paid in forty-five days. Add all that up and I was looking at a four-month cash-to-cash cycle, recouping $48,000 (after deductions, discounts, and all the free product, we never received the full $60,000 we invoiced) four months after I made the first payment for the product.
Here’s the problem that illustrates why even profitable businesses can fail when they don’t have cash on hand: We were growing, year over year, but the monthly income was wildly variable. The prime beverage season was April through October, with June through August being the cash cows. So $55,000 might come in one month, and only $17,000 a few months later. Expenses were variable as well. If I needed to get ready for a big summer promotion, I’d have to order five containers in late winter or early spring, which were bad months for income. I’d also have weekly and monthly expenses that couldn’t be put off, including paying employees, rent, warehouse fees, insurance, and more (collectively my burn rate). There are ways to solve this cash flow problem with supplier financing, bank loans, payment terms, receivable factoring, etc. But these solutions are rarely available to small start-ups without hefty up-front costs or usurious interest rates.
I was constantly trying to balance cash flow and supply two or three months into the future with a bunch of unknowns. If not enough money came in, I couldn’t pay my Amacoco bill to get the product on the boats headed to the U.S. Pallets of Zico would sit in their shipping facility while I scrambled to get distributors and retailers to pay their bills. If I ordered too much, I’d be stuck with extra warehousing bills and product that might not sell by its expiration date.
By the end of the summer of 2005, we were gaining a little traction, and the good news was that Zico was selling well, and velocity (the rate of sales per outlet) in yoga studios, natural food stores, and small shops was strong and growing. We were also gaining new accounts every week. The problem was that it all just wasn’t happening fast enough. We were up to about $20,000 per month in sales when we needed double that to begin to see black. The $500,000 we had raised from existing investors at the beginning of the year was depleting quickly, and I would have to look hard yet again at reducing all expenses and finding new investment capital.
When Maura asked how the business was going, I often reported to her all the sales we had made on paper—not what we actually had in the bank. It wasn’t long before she caught on to my all-too-optimistic accounting and began to realize we were not only not out of the woods yet, we were just beginning to get to the deepest, darkest parts.
OUR FIRST RESIGNATION
Maura had been intimately involved with Zico from the beginning but did not have an official job title or set of responsibilities or salary. Basically she jumped in where needed. In 2003 and 2004 between breast-feedings, she eagerly researched and worked on the original business plan with me. When I was traveling for IP, she was the point person for everything, including following up with team members on their parts of the R & D process. She shopped for wearables and giveaways, helped with packaging, copy, and messaging. She worked the trade shows. She was a great sounding board for me with strategy, investor reports, and priorities. She has this knack for remembering details and conversations I sometimes conveniently forgot (or tried to forget). She was my biggest fan but would always give it to me straight—sometimes to my chagrin.
In late 2004, I asked her to be in charge of a few specific roles more officially: public relations, events, and coordinating demos. We could not afford to continue to retain the public relations firm we were paying $5,000 per month. So I made Maura the offer that Zico would hire her at $3,000 per month and she could work completely flexible hours, but she would get paid at some future date. Look at the bright side, I said, you won’t have to pay much in taxes for a few years.
She agreed to take the job and she was great. She found the right events and got us into them and she continued to generate good press. She schedule
d samplings at stores, often staffing the table herself. She, Roberto, and Jose got along famously and complemented each other’s skills. We had a few disagreements here and there but I thought we were working through it well. I tried to treat her like other employees, at least during team meetings. I was tough with everyone: I had high expectations and welcomed all feedback but made my own decisions. Going to events together, having lunch together some days, talking strategy, celebrating new sales, and sharing the burden of the frequent setbacks were fun to do together. But our “pillow talk” now often became about warehouse fees and customs forms that needed to be filled out. Talk about a mood killer. Before she was giving her opinion, advice, or serving as a sounding board for me from the outside; we were figuring it out together as a team. Now she was reporting to me and I struggled with how to hear her opinion and input relative to Jose and Roberto and respect everyone as equals. She did not enjoy or embrace being managed by me. Our marriage was predicated on equality, but in business I had the last word.
One Saturday evening in the fall of 2005, Maura pulled into the driveway after running a promotion at the finish line of a race. We were tag teaming that weekend so she covered that event and I had one in Montauk, on the eastern tip of Long Island, early the following morning.
“Hi. How’d it go?” I asked.
“Fine,” she said. “Runners were loving Zico, spectators about fifty-fifty.” I waited to hear more but she was unusually silent.
“Could you finish unpacking this stuff?” She exhaled, already turning toward the house. “I’m exhausted and I haven’t seen the girls all weekend. By the way, your truck is totally out of alignment and fishtails on the highway. I’m not driving that thing again until you get it fixed and neither should you. And the pop-up tent is broken. We need better ones.”
I took out the barrel coolers and turned them upside down on the driveway to drain, and rearranged a few loose T-shirts and pamphlets. I’d be driving the same electric-blue five-year-old Nissan Pathfinder two hundred miles round-trip for the Montauk triathlon in the morning, so I loaded it up with cases until it could pass as a low rider.
When I finished I went into the house. The girls were playing downstairs but Maura was nowhere in sight. I found her sitting silently on our bed upstairs. From the way she held her shoulders, I could tell something was very wrong.
“You okay?” I asked from the doorway. When she began to cry I knew the answer.
“Mark, I can’t do this,” she said in between sobs. “I’m resigning from Zico. Zico is a great product, I believe in the vision and will continue to support you. It’s just too much. We only talk about work. You’re always stressed and me working with you, for you, basically doubles the pressure on both of us. And we need some outside income so that we can pay our bills.”
I wish I could tell you that my initial reaction was calm understanding and reassurance. What I actually said was: “You’ve got to be fucking kidding me. You can’t quit.”
The formality of the word “resigning” angered me. She wasn’t resigning, she was bailing, abandoning me on a sinking ship, deserting me in the midst of battle!
She handed me a piece of paper she was holding. Holy cow, I thought, she’s written up a formal resignation letter! Then I recognized the document as the original screens we had made when evaluating business ideas. They specified our hopes for the venture but more importantly, they listed some nonnegotiable items. We promised each other that we’d maintain our health and our integrity, that we’d bring the world a healthy product, and that we’d be honest with those investors and employees who partnered with us. The last item on the page was underlined. We promised each other that we would not let starting a business endanger our marriage.
“I believe in you and don’t want you to feel I’m bailing on you,” she said, still in tears. “This is so hard for me to say. Mark, no business is worth risking our marriage. We swore to each other that we wouldn’t let that happen. Now is the time to come through on that promise.” Her voice conveyed no anger or accusation. She was simply stating a very difficult fact that I—in my overly optimistic style—had been avoiding for months.
My feelings of abandonment didn’t magically disappear but Maura’s forthrightness and honesty began to sink in. There was a long silence as she allowed me to think through what she had said.
“I get it,” I said, sitting down next to her on the bed. “I can only imagine how hard this was for you to say.” She started to cry again as I pulled her close, but this time there was some relief in the sobs.
“Mark, I’m not quitting you,” she said. “I’m leaving the day-to-day at Zico. I still want to be involved. And actually when we first started out we agreed I’d help launch it and work in it for about eighteen months until we got off the ground. We need reliable income now, not in three years when Zico might be able to pay me. There is a maternal- and child-health nonprofit nearby. They need someone to develop a curriculum to help low-income women have healthy pregnancies. It’s totally up my alley and the pay is decent for a nonprofit.”
“Yeah, that does make sense.” I sighed. “Let’s go make dinner for the girls and not say another word about Zico. Let’s open a nice bottle of wine.”
“It might be a good time to open one of the moments we’ve bottled up,” she said. I understood what she meant right away. Often in moments of special joy we’d turn to each other and say bottle it up, we might need to tap into this when things get tough. Before Zico we had done a lot of bottling but rarely dipped into the cellar.
“Which one should we open?” I asked.
“Maybe that first time we took both girls to Tesoro Beach in El Salvador,” she said. “Let’s have some of that one.” She smiled as I made my best attempt to make the sound of a cork popping from a champagne bottle. “The sound of heaven as my dad would say.” She grinned.
I’ve seen many romantic partners found and operate businesses together. Some are wildly successful: Janie and Lance Hoffman from Mamma Chia, for example. In my personal experience, however, it rarely works out on the business or couple fronts, especially with children in the mix. I am not a fan of couples businesses and I can assure you it’s a red flag for most smart investors. It can work but it’s tough.
Simply put, Zico would not exist or be what it is today without Maura. She played a critical role. But we both agreed our relationship was nonnegotiable and her stepping away from the day-to-day operations probably saved our marriage and was certainly best for our girls. I also believe it helped us make Zico even more of a force; she continued to make a major contribution to Zico’s ultimate success and allowed us to win as a couple. But at the time, her resigning was a low point. Unfortunately, things would get worse before they got better.
THE INCREDIBLE SHRINKING COMPANY
So the small staff of Zico was reduced by one and, sadly for the company’s finances, Maura was the only employee besides myself willing to defer salary into the indefinite future. Our team at the time included me; Roberto and Jose, who worked 50 percent of their time as consultants to Zico (Roberto on sales and Jose on marketing); Juan, who managed the back office, took orders, manned the phones, and did whatever else was necessary; Chris, who was our first sales hire in 2004 and managed half of Big Geyser’s territory; James, whom we had hired at the beginning of the summer to be a counterpart to Chris and manage the other half; and Jhonnie, who worked part-time dropping off product, driving the van for demos and events, and was himself developing into a solid salesman occasionally calling on accounts on sales blitzes or route rides.
As 2005 came to a close, I recognized that I was going to have to cut back even further. Worse still, summer was over and with it the hot and humid months when people spend a little extra money to quench their thirst. Even though those Bikram studios would still be cranking out the heat, our growth would likely slow in the winter—maybe even decline—and Zico couldn’t live on sales to
Bikram yoga studios alone.
It wasn’t for lack of effort that sales were not taking off. That year, 2005, we had displayed Zico at Fancy Food Shows in San Francisco and Chicago and at Expo East in Baltimore. We had taken meetings with twenty-one major retail accounts from ShopRite to Costco. We met with a dozen brokers (sales agents that would represent Zico when selling into larger chain retailers) and signed seven to represent the brand. We met with fifty-six distributors across natural, beverage, specialty, and sports channels. And we had been contacted by potential distributors in Australia, the UK, Singapore, Spain, Germany, China, Taiwan, Japan, India, Argentina, Denmark, Thailand, Jamaica, Costa Rica, Canada, El Salvador, the Bahamas, Barbados, Dominican Republic, and France. This in addition to hundreds of account calls in New York and giving away thousands of cases at demos and events. I also personally had discussions with at least fifty potential investors. But despite all that, none of it was happening fast enough.
All told our payroll was about $24,000 per month plus another $2,300 for rent. Everyone was being paid well below market, especially Roberto, Jose, and me. But even so, our monthly burn rate, which averaged out to about $60,000, was still too high given our level of sales and the capital we had raised.
I calculated that I needed to get our total monthly expenses to under $25,000 if we were going to be able to survive the winter and have more time to find new investors and grow sales.
In early October 2005, I had a meeting with Roberto and Jose in the small conference room of the office we shared. They had both quit good full-time jobs to start their own marketing and advertising firm, and Zico was their principal client. Roberto was an investor and both had earned equity in Zico. But we had been clear from the beginning that their continued engagement was based on us achieving certain sales targets, and the unavoidable truth was that we were at a fraction of what we had predicted.
High-Hanging Fruit Page 13
