Business Musings: Over Capitalization and Hamster Wheels

Business Musings: Over Capitalization and Hamster Wheels

I am slowly coming to terms with how sick I was those last few years in Lincoln City. It’s a tough, slow process, because I got really far on denial. If I pretended I was fine, I managed my daily steps, my daily run, and my daily word count. Everything else fell by the wayside, but those three things remained, more or less until early this year.

One of the things that sustained me that last year was a company called Chef’d. Lincoln City, Oregon, is a small, small town, with only a few grocery stores. One of them (the largest) was mismanaged terribly. It survive(d)(s) by getting those sample products, and testing them for the market. I could eat most of those samples. The problem was that by the point I discovered and then used them, the store would discontinue them.

Eating really became a challenge.

Enter Chef’d. It was one of those meal order services, but unlike the biggies, it catered to dietary restrictions. I could order  (and get) dairy-free food, and be certain that all of the ingredients were dairy free, even the items like a prepackaged sauce. The other places won’t do that.

As I got sicker, Dean learned to cook exotic (and edible) meals from Chef’d. Together, they kept me alive.

Last summer, Chef’d got hit by the massive heatwave. Their produce arrived at their warehouse wilted. I think there was trouble with the meat as well. The folks at Chef’d refused to let the product out because it was so bad, and they ordered new. Unfortunately, they didn’t tell the clients, and we all got really upset when our meals didn’t arrive.

The small company had put all hands on deck to solve the problem, but forgot to inform their customers.

I said to Dean at that point, They’re in trouble.  Because even if Chef’d sued their produce (and other) suppliers, they wouldn’t get the money right away. And I know, just from the order numbers, that customers fled in droves after that.

It was a luxury service anyway, so people moved on to other companies. I did too, by March, because I had moved here.

Then, last week, I saw a note in The Los Angeles Times that Chef’d’s grocery arm had been sold. (They also had prepackaged foods in high-end grocery stores.) The article mentioned that Chef’d had gone belly up earlier in the month. Apparently, they had been surviving on venture capital. They had gone back to the well, and no one wanted to invest again.

Not a surprise, particularly after last summer, but very sad for me, because they had kept me alive.

That same news day had information about MoviePass. MoviePass, for those of you who don’t know, is a subscription service for movie tickets. I’ve been keeping my eye on it, because I wasn’t sure how it would work. And now that I’m in Vegas, I’m seeing a lot more movies. My move coincided with a lot of speculation in the financial news about MoviePass’s problems with financial management. So I decided to hold off on even trying MoviePass.

I’m glad I did. On Thursday, MoviePass customers heading to major theaters couldn’t get their tickets. At all. Needless to say, these customers were pissed and let fly on Twitter.

This is one of those warning flags, like the heatwave problems that Chef’d had. It shows that the model is not sustainable in its current form.

But there’s another problem.

MoviePass, like Chef’d, did not start organically. Both companies started with a great idea and a lot of venture capital. I have no idea if they spent their money wisely—I’m not going to dip into their financials to see—but they had problem that overcapitalized firms often have.

Their actual sales did not keep up with their expenditures.

And yes, I know that’s normal in the formative years of a business. Most businesses have lines of credit, because the cash flow does not keep up with the expenditures from month to month. In the first five years, most businesses lose money. Eventually, the business will make money, but it might not make the money at the right time.

That’s a cash-flow issue. Rent, employee costs, supplier payments, all of those go out on a regular basis. Income isn’t always regular. Think movies for a moment. There’s no real way to know, until the ads go out and the audience comes in, which movie is going to succeed and which one isn’t. Apparently someone thought the Dwayne Johnson Die Hard-ish vehicle Skyscraper was worth a summer tentpole, and that movie tanked. (We saw it on the Monday after opening weekend, and the very large theater was empty. The nearby theaters were full…of repeat Ant Man And The Wasp fans, and families seeing Hotel Transylvania 3.) Skyscraper looked like a perfect hit on paper, and it wasn’t.

There are no guarantees in art, even massive commercial art, like major movies. I’m sure Skyscraper will earn more money overseas, but it didn’t meet expectations here. And MoviePass is dependent on movies being something people want to see—enough to shell out $10 a month—but MoviePass was also gambling that moviegoers would treat the service like a gym membership. The moviegoers would continue to use the service even in months where they didn’t want to see a film. Who knew that 2018 would have blockbuster ticket sales in its first two quarters?

Anyway, some financial slippage is normal in all new businesses—hence lines of credit. But major financial slippage is the sign of serious problems.

And in new ventures, in services that aren’t yet established or franchises that started with a lot of investment money, the people in charge of the business have no idea what the natural earnings are. They can guess, but they might be guessing like the studios did with Skyscraper. They might be guessing wrong.

(They also guess wrong on the other end as well: Black Panther opened at major blockbuster status, and surprised the white heads of studios—who ignored the early ticket sales and the excitement that showed incredible interest in the film. Fortunately for the studios, movie theaters can [and did] add shows. If Black Panther had been a physical item, there wouldn’t have been enough copies of it in stores to meet demand.)

Yeah, yeah, there Kris goes again. Business crap about other businesses. Hey, Kris, how does this relate to writers?

Well, you see, I’ve still been noodling the question I asked last week about the writers trying to game Amazon’s algorithms and seem to have lost the heart of their writing. What motivates them?

And yes, I know that there are a million scammers. It’s really not necessary to explain to me how those scammers think and operate. Seriously, I’m not that naïve.

But I know a lot of real writers—and you probably do too—who are still trying to game those algorithms. Those are the people I’m trying to figure out.

And Chef’d and MoviePass helped explain them to me.

Back in the early days of indie—hell, in the middle years as well—an inexperienced writer could make what they considered to be a boatload of money by publishing a book and then gaming Amazon’s algorithms. The other services, iBooks and Kobo, don’t have as big a platform (in the U.S.) as Amazon, nor did those services have the kinds of systems (like KU) that could be messed with easily.

So these writer/gamers ended up on Amazon.

And if you think of the boatloads of money as venture capital, you’ll start to see the problem.

These writer/gamers used the system to increase their income dramatically. Above, I said what they considered to be a boatload of money because what’s a lot of money to you might not be a lot of money to me (and vice versa).

The thing is, the writer/gamers did not earn that money organically, by building one reader at a time. These writer/gamers got paid by page-reads or by downloads or whatever system Amazon was using at the moment.

Early on, I’m pretty sure these writer/gamers were writing for the love of writing. Then they got into KU and figured out the system and goosed their income. Who can blame them? Becoming a full-time writer is a dream for all of us.

The problem is that a lot of these folks increased their expenses at the same time. I remember watching a former student of mine blow the increased money that she made on cruises and gifts and all kinds of non-writing expenditures, as if the increased funding would last.

It didn’t.

These writer/gamers got into that situation that Chef’d and MoviePass found themselves in. The income kept fluctuating, like income does, and the expenses had grown to an unsustainable number.

It was as if, for these writer/gamers, Amazon was their angel investor, their venture capitalist. And like those investors in those large companies, the gravy train ended or isn’t as big as it was. Which made survival a lot harder.

When people’s financial survival is threatened, they often make bad choices.

The writer/gamers share another problem with the businesses like Chef’d and MoviePass. These writer/gamers don’t know what their normal sales are.

They’ve gamed the system so long that they have no sense of how many loyal readers they have (if any) or how well their books would sell in a downturn. That makes planning impossible.

I’ve been thinking a lot about that too because of my circumstance. Getting so sick this past year meant that my output went way down. There are new pieces but they were a struggle to write. And, as Allyson Longueira of WMG pointed out in a phone meeting a few weeks ago, I only published one new book in 2018—and that was nonfiction. (I usually publish a lot more, not counting the compilations and everything else.)

That had an impact on sales—a big one—but the impact was not unexpected, given what was going on. And here’s the nice thing, for me at least: the baseline of my regular sales, even in a downturn, was higher than I expected. How lovely.

I saw the downturn coming in November of last year, although I attributed it to the project I was (and still am) working on. When we all did financial planning, we planned for no real growth in income from my writing and WMG did not plan on any growth in income from my publications in 2018. We expected the downturn and planned for it.

We knew, from previous slow-downs, what my baseline sales are. And we could plan accordingly.

But if I were struggling to maintain the income that had been artificially raised by gaming a system—and then I stopped gaming the system—I wouldn’t have those baseline numbers. I wouldn’t have been able to plan.

These writer/gamers can’t plan either. Because they don’t know what their natural earnings are. (Neither did Chef’d and neither does MoviePass.)

Last week, I put a person in a hamster wheel as my artwork because that’s what happens when a writer is chasing an increasingly impossible financial goal.

But what writer/gamers need to do is jump off the wheel. You don’t have time to think when you’re moving 24/7. You need to stop, and take a deep breath, and figure out exactly where you stand.

Businesses that started with too much capitalization, though, don’t have that option. Because those businesses usually have artificially high expenses. They had so much extra money at the start that they could build the “ideal” business, rather than cautiously build a sustainable business.

What do I mean? Ideal businesses have the best ingredients or can overpay their CEOs. (MoviePass’s CEO made nearly $10 million in 2017, on a business that hadn’t turned a profit yet.)

Sustainable businesses put off big expenditures. Sure, they want the best ingredients or they want to pay their CEOs in the millions too, but they can’t afford it…yet.

Sustainable businesses plan to be around ten years from now.

Ideal businesses hope to make a profit ten years from now.

See the difference?

The problem for the writer/gamers was that they didn’t realize they had received investor dollars. These writer/gamers thought they were playing with their own money, money they had earned, not money they had scraped together by figuring out a system. (And if you don’t think getting boatloads of capital from investors is any different, you haven’t tried. There’s a way to game that system too.)

The writer/gamers never planned for the income to stop or go down. They didn’t bank their earnings. They didn’t think it through.

I don’t blame them. It’s heady to make a lot of money very fast. But the key is to hang onto that money for years like the one I just had.

No one—not a single long-term writer—goes through life without a downturn in output. As I drove home from that massive reading session where I found out about Chef’d and MoviePass, I heard an old Stephen King interview on Fresh Air. He was talking about that year he got hit by a truck, and how the accident influenced his writing. In passing, he mentioned all the time he spent healing and not writing.

It happens to all of us. Which means that we have to plan for it, as best we can.

Planning is hard. But necessary.

If you’re one of the writers who is on a hamster wheel of your own, start banking some money. It doesn’t have to be a lot—maybe only a small percentage of what you’re currently earning—but it will help. And put it in a place where you can access it easily, but not a place you visit often.

I’m thinking something like a savings account at a bank that is on the far side of town. Don’t sign up for online banking. Make it hard to take money out of there.

And why am I saying a savings account, rather than in stocks or even a money market certificate or some other investment? Because you need to be able to remove that money without penalties.

You’re taking risks just by being a writer. You are, in this modern era, as much of an entrepreneur as the folks who started Chef’d or MoviePass. The difference between them and most writers it that the folks who start big businesses like that know they’re taking huge risks.

You need to understand that as well, and act in the same way.

Many of you who read this weekly blog aren’t writer/gamers. You tried the systems and moved on or you didn’t try at all, just doing your writing and publishing and watching from afar. Good for you. You’re building sustainable businesses.

But you also need to acknowledge the risks of what you’re doing. It’s hard to build a business, whether that’s a restaurant or a retail store or a writing business. It takes day-to-day massaging, and a focus on making financial decisions while nurturing your creative side. Because without the creative side, you won’t have a business that you want…ten years down the road. You’ll be on some hamster wheel. And that’s not what any of us want.

***

When we’re all incredibly busy in this business that we love, it can feel like a hamster wheel. The difference is that when I say you need to get off, you’ll balk because you want to be on that wheel—getting projects done, having fun, doing what you love. When you’re on a real hamster wheel, you can’t wait to get off, and you think it’s impossible.

Keep that in mind.

I do, particularly when the deadline shows up to write this weekly blog. I could get another day on my fiction writing or maybe even take a day off to see a few movies. But I don’t want to. I’d miss you all.

Thank you all for the links and the quotes and the comments and the support. It’s been fun to see everything you’re sending. I greatly appreciate it.

I also appreciate the financial support.

If you feel like supporting the blog on an on-going basis, then please head to my Patreon page.

If you liked this post, and want to show your one-time appreciation, the place to do that is PayPal. If you go that route, please include your email address in the notes section, so I can say thank you.

Which I am going to say right now. Thank you!

Click paypal.me/kristinekathrynrusch to go to PayPal.

“Business Musings: Overcapitalization and Hamster Wheels,” copyright © 2018 by Kristine Kathryn Rusch. Image at the top of the blog © Can Stock Photo / amatevosyan1982.




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17 responses to “Business Musings: Over Capitalization and Hamster Wheels”

  1. […] you were confused by Kris Rusch’s post on over capitalization and hamster wheels, here you have another take on how cash flow can work for a writer. Or you can come to the Business […]

  2. Wayne Borean says:

    I have an advantage of sorts. I’m on permanent disability. I have a steady cash flow, even if it isn’t as much as I’d like.

    Which is really useful when I have one of those months or years when my brain turns to tapioca.

    But I’ve actually been feeling pretty good this year. Got paid for editing a novel, have stuff of my own in the pipeline, and am working with a small press on the idea for an SF anthology, which if they take it I will be editing.

    Sorry to hear about how bad you got hit. I’m glad you are feeling better now. You sound better – some of your posts from last year didn’t seem quite right at the time. It was Kris but not Kris, if that makes sense.

    Lots of hugs ? and thank you for talking to us.

  3. When you’ve been a Movie Pass customer, like I have, the parallels are even more startling. They launched with TERRIBLE customer service and it’s only gotten worse. They’re 100% dishonest in how they charge you for the service, don’t disclose processing fees, and change the way the service works without notice. You pull up the app to get a ticket, and it either won’t let you open it or it doesn’t recognize your account as valid. That’s where I’m at right now as I try to cancel the stupid thing.

    Searching Movie Pass on Reddit is frightening. I don’t think they actually remove stored payment info for people who have cancelled, because there are hundreds of people having to put stop payment notices up at their bank and on their credit cards, even six to eight months after canceling. A big part of their financial woes is due to their lousy customer service driving people away by the thousands every month.

    It’s a study from top to bottom in how not to run a business.

  4. Thomas E says:

    One piece of advice I remember that Stephen King gave about the period of his writing slump was about one method he used to create savings…

    As a traditional writer he was limited by his publisher on how many books he could publish a year. Maybe 4. ( Which is mad for an author as big as king). But he wrote 2500 words a day or 6 of his huge books a year.

    So he built up a large trunk of novels.

    When life happened he kept his business of publishing new books going through this trunk novel fund, lol.

  5. Kris,

    You’ve compelled me to finally write up my cash flow management strategy. I hope you’re happy.

    Some of you writer types might find it useful.

    https://blather.michaelwlucas.com/archives/3232

    • Really good, Michael. Thanks for sharing. Everyone, go read this.

      The only thing I disagree with is that you need to scan the information quarterly, and revisit it every six months in depth. That’ll stop expenses creep.

      • Thanks, Kris.

        If I said quarterly, they’d run screaming. If you say quarterly, they’ll take it as sage advice. 😉

        Unquestionably, the closer you watch cashflow, the better off you’ll be.

  6. […] Rusch’s writing business blog has a lovely article about business capitalization and implosion. As an IT nerd who survived not one but two dot-com crashes, and as a writer who’s been paid […]

  7. This was a good read, Kris. Thanks for putting all of these thoughts together.

    The main thing I’ve had to learn in my recent career change to 3/4 time writer and publisher is to have an actual business plan. This means I’m able to experiment with short term strategies, because they are not the end-all-be-all, they’re simply part of the larger plan.

    As you and Dean always say “You’re in charge of your own career.”

    Before I went mostly full time ––aka started a new publishing business–– I downsized all of my expenses. I’m now watching my writing/publishing income slowly grow, which is great. I’ve got a few streams of income and plan on building more in the coming years.

    It’s funny, when I was trad pubbed and got my first advance ever of $50k, I was scared. I knew that number meant unrealistic pressure on my career. My agent talked me down. Turns out, I was right. When that book didn’t earn out in the first year, it affected everything that followed. It was a lottery win, not a business plan. I think the gamers of the system keep trying to engineer lottery wins, thinking they have a business plan. But a real business plan knows there are always contingencies, and relying on one source of income is very risky.

    I’m happy to be learning and experimenting and knowing that I’ve got a publishing business to run along with being a writer.

  8. Kate Pavelle says:

    Kris, you nailed it. When my Amazon writing income went from twenty bucks a month to two hundred and then to two thousand within half a year, I looked at it as “natural progress,” not a bubble. Great, I said, and spent all the money (on narrations, book covers, courses… putting it back into the business, but still, it vanished like pipe smoke.) The good news: realizing what’s going on, thank you for providing guidance in that.
    The last year has been eye-opening, but now I have a better understanding of my natural base and how much my writing generates organically. How slowly my base grows organically. Seeing a comment on “how come I’m discovering this series only now?” is a real pleasure, though, it means people are finding it and the covers and blurbs are doing their job.
    Also… I should write and submit more short stories. One of my shorts earns as much as an average stand-alone novel. With a productivity goal of 10 novels and 25 short stories a year, I think I will gain traction eventually, and I can’t wait to see what I learn in the business master class in Vegas! It’s good to have a plan.

  9. You don’t need me to tell you this is fantastic advice, but I’ll tell you anyway. I was blessed to have been raised by parents who were smart with money. It’s because of them that I’ve consistently had six months of emergency savings since I was in college and also why I pay my credit cards off every month. As you said, those rainy days come quickly and unexpectedly–sometimes they’re just a drizzle, sometimes they’re a full-blown cyclone. The better prepared you are, the less stressful things are until the sunny days return.

  10. Ken Hughes says:

    Another link in the chain of what can happen to writers. Thanks for showing this to us.

    The most infamous example of unsustained cash is probably lottery winners– and the statistics on how few of them have their money or much to show for it after a year. Of course writers and business owners with an early excess of cash only joke that it’s from winning a kind of lottery, but the extreme makes the pattern even clearer. Too much of a good thing, if you don’t learn to handle it, is not a good thing at all.

    And, it’s good to hear you’re recovering.

  11. Vera Soroka says:

    I think some of these writers have become desperate writers who have not made much money and then when KU started, they saw a chance to make money by writing to market and writing fast. The rapid release model is one of those things pushed. Write at least three books before publishing. Newsletters are another thing that is gamed. And there are courses on how to do all of these things. Desperate writers put their money into all of this and most do not come out on top. Then they get upset when the scammers pee in their KU pool and Amazon tweaks once again and ends up taking them out as well. It becomes a vicious circle. I considered doing a series for KU but when you hear all these horror stories, I think going wide would be better.
    I am writer who has not made money and I will admit when you see certain writers cleaning up on KU, it makes you not think straight. Keeping the focus on your own business is hard and most of these writers live in this ‘now’ internet world and don’t want to think long term. That’s the allure of the KU. Living a freelance lifestyle is something that they have no idea about so putting money aside is not going to happen. They will blame Amazon for any income downfall instead and the scammers who they scream at Amazon for not getting rid of. But they will always be there. So the gaming continues and the desperate writers continue to look for ways to make money in the Amazon system.

    • Jeff says:

      Writing to market and writing fast isn’t what she’s talking about. That’s not gaming the system, that’s called working hard. She’s talking about the book stuffers, the people who mess with there formatting, the scammers. Training yourself to write fast and write what people like is called building a business. You make it sound like people are ‘cheating’ if they know how to write fast and write what people like to read. I’m sorry you haven’t seen the success you want, but you will if you keep working on it. Don’t blame other writers who are, though, and think they are gaming the systems just because the release a lot of books.

  12. This is one of those areas where I feel fortunate. Back in the 90’s, I’d been paid as an independent contractor, so I have a realistic idea of how indie finances work. They don’t work, so I learned to sock away mounds of cash to cover my quarterly taxes, and because I lived by myself, lots of money for the mortgage. (Since then, wife + child changes the equation. What savings?) I have a firm idea of how much money it would take to just go indie with parity to my present profession, and it isn’t $50k. My rule of thumb is to divide earnings by two, which makes $50k indie comparable to $25k employed. That’s not a number which impressed me. I’d need well over $100k for multiple years to even consider going full time.

    My business plan is primarily to build up IP while I work (that takes time) and learn to monetize my IP (which I haven’t learned to monetize yet). This business is proving even more complicated than I had assumed, so it’s a good thing that I don’t need it to eat. When I retire, I’ll have my retirement income, and hopefully whatever writing provides (if anything).

  13. Oh, wow! This post made a whole bunch of puzzle pieces fall into place for me. Now I understand some of what I’m seeing in the indie world that had bewildered me. You’ve given me a framework that makes sense and will help me evaluate some upcoming decisions I need to make about marketing and spending for it. Thank you so much, Kris. This was so helpful. I hope you are healing, now that you are out of Lincoln City, and that the coming months see your health fully restored.

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