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.

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