Today I’m starting a new series called “That Time”. With it, I will share some interesting stories (usually about entrepreneurship, failure, and what I learned from it). Without further ado…
Back around 2007, while still working on my yet-to-be-successful, one-man, small software company, I was still experimenting with a number of small business ideas and investments. I really couldn’t find enough ways to lose my money. Haha.
I was living in a brand new townhome (bought/built end of 2005). The townhome itself was supposed to save me money, but when I was comparing it to an apartment, I never considered the cost of PMI, insurance, or HOA fees (but that’s a negative financial story for another time — and please refer to the Darth Vader quote again). My neighbor (we’ll call him Steven) was into custom wheels. Shiny, custom, unique, aluminum, expensive, high-end wheels (ASANTI is probably the most well-known high-end brand in the business). Steven had done sales of custom wheels for another wheel company for a number of years, but had recently left the company.
One day we were chatting, as neighbors tend to do, especially townhome neighbors — you’re just living SO close to one-another, and he mentioned he was going to try to start building and selling his own custom wheels… his own designs and brand. Not wanting to be a sucker for investing in a new business, I did not bring up investing in his venture immediately — I thought I would be wise and see how things go. LOL… wise.
The Basics Of How Custom Wheels Are Made
You can’t just build custom wheels in your garage. I guess maybe you could, but you would need a really large garage. Custom wheels are made by sourcing raw aluminum, melting it, and pouring it into a mold of your custom wheel design. So making a custom wheel, you have to first design your custom wheel using CAD software like Autodesk. When you’re designing you have to now only consider the look and style of the wheel, but the strength of the wheel from an engineering stand-point. Once you believe you have a solid design, you then pay to get a mold created. With the mold, you can then pour the melted aluminum and voilà (pronounced “wall-a”) you have your first custom wheel. Next, there are a number of tests you perform on the wheel to make sure it can hold up to normal driving*. Assuming they hold up in testing, you can now semi-confidently sell that style. You then “rinse-and-repeat” to create a number of custom designs. This is all a fairly expensive process and raw aluminum in-and-of-itself is expensive to source (for the best price you purchase it overseas and have it cargo shipped). For a set of wheels (4), the raw materials alone would cost about $2000.
*Side note on “normal driving”. Don’t hit any large pot holes or try to cross any medians in a vehicle with custom wheels. They can usually NOT withstand the impact of a hard corner into the wheel. They will bend… and if a round wheel bends… well, it’s no longer round and won’t roll properly. My son was about 16-17 during this period. I had a Cadillac Escalade with custom wheels. I let him drive it occasionally. On one of his drives, he missed an exit and tried to cross a median at the last second… it didn’t work. He didn’t see a huge concrete ditch in the median and super jacked-up two of the wheels. The vehicle was completely undriveable and stuck in the median. It ended up having to be towed, and “normal” wheels had to replace the custom wheels while two new custom wheels were repaired. (I do not use custom wheels anymore, and I would never recommend them ever again.)
My Investment Idea
Fast-forward a number of months down the road, I checked in with Steven, and he had created a couple of designs and had already sold three (3) sets of wheels. It was super-slow going overall sales-wise though, because in order to sell custom wheels, you need to have some designs in stock so you can immediately fill an order* when someone likes your designs. He had really limited funds, and he needed money to be able to buy more source/raw aluminum and pre-build some common sizes (19″, 20″, 21″, 22″, and 24″). I was impressed by what he had accomplished so far, and the designs really did look good (the three in the main post image are actual designs from the collection). So I came up with a can’t lose, fail-safe way for me to invest. I would give him money for raw materials, and he would create only designs and sizes he knew he could sell. In super-simple math, I give you a $1 for raw materials, you create a wheel at a cost of $1 more (so $2), you sell the wheel for $4… rinse-and-repeat. Can’t lose, right? I invested $30,000 so 10-15 sets could be pre-built and ready to sell.
*Side note on “immediately fill an order”. After I invested in my neighbor’s wheel company, I tried hard to convince him NOT to create too much inventory and compete on price. He argued people would not wait 6-12 weeks for custom wheels. They wanted them now. I argued if you’re saving them $2000+ that they would wait, and it would be much safer business-wise. Then ended up being one of many mistakes that were made by him.
What Could Go Wrong?
The actual numbers were more like $2,000 for raw materials, another $1,000-$2,000 in labor/manufacturing costs, and then sold for $5,000-$6,000 (the higher end wheels we were competing with sold for $8,000-$12,000). No credit to deal with, because we were low enough we didn’t have to offer credit or terms to dealers or direct-to-consumer. So with every set sold, you get your $2,000 back AND you make another $2,000 or so profit (we weren’t going to take any money out to pay ourselves)… which that return of investment plus profit allows you to make two more sets… and those two sets once sold allow you to make four sets… and on-and-on. Again, with a plan like that, what could go wrong? The math says you can’t lose!
What DID Go Wrong
The way a plan like that goes wrong is the person you invested in executes a completely different plan. Once he had my money, he got the idea he could “sell” more wheels by giving credit terms to dealers, “spreading the brand” by sending a set of wheels to a few dealers nationwide so they could show customers the wheels up close. This was a completely different business model than what we discussed and agreed on. I wasn’t able to stay on top of what he was doing, because I was running my own business, and I wasn’t going to be involved in day to day operations. I had no reason not to trust him to execute the plan.
Of course, over the next year or so, this plan blew up in his face (and lost all my money). It worked with about one-third of the dealers, but the other two-thirds either couldn’t sell them to anyone or they kept the money (ie. stole). And of course, since he was such a small business, he couldn’t enforce anything to get his money and/or wheels back from the dealers. And some of these dealers are… a little rough to do business with (they might pull out a gun if you came wanting your money). Compound that with the fact he ran into financial problems and needed to start taking some money for himself (with the intention of paying it back later — which never happens). It all went quickly down hill, and I moved on — losing everything.
What Did I Learn From This Failure?
- Execution of any plan is key. No sense in planning something if you’re not going to execute the plan.
- I learned you can’t take someone at their word. A person will look you straight in the eyes and tell you something they agree to and believe, but later change their mind. I believe he was being honest when he first accepted my money. It’s simply that he had a “better idea” once he got going.
- People are only loyal to themselves. Or if they are loyal to you, they are loyal to themselves and their family first. Nobody will put your first more than you.
- I’ve also learned over time to be careful who and what I invest my money into. For me personally, I may never invest in another person for the rest of my life. I’ve had bad luck investing in other people — or you could say I’m terrible at judging investments with other people… either way I’ve learned it’s not good for me. More stories to come.
Lessons like this can make you un-trusting and cynical. I am cynical, but I do still trust and take people at their word. What’s different now is I am no longer surprised when someone doesn’t keep their word. I don’t expect it, but I’m not surprised by it, so I’m never caught off-guard. Ronald Reagan was famous for saying “Trust, but verify”. I agree. There are more stories that went along with this story that got me to the mindset I’m at now (cynical), and I’ll share those in the future. And spoiler alert… almost all of it is related to someone putting themselves first instead of honoring their word.
No excuses. No explanations. You don’t win on emotion. You win on execution.Tony Dungy
You can (and will) fail with a “Can’t Lose” plan if you don’t execute it properly.Mr. Hobo Millionaire
Do You Know What $30,000 Would Be Worth Today?
That $30,000 investment would have turned into about $100,000 over the last 10 or so years if it were invested in the market. And by the time I reach normal retirement age mid-to-late 60’s, probably $250,000+. A lot by itself, but I’ve had a few bad $30,000 losses over my lifetime. Compounded, I have no doubt they’ve been worth 1M+. Oh, and I’m not counting good investments that simply didn’t work… I’m talking about dumb stuff. I was in debt, hadn’t filed taxes, and owed the IRS when I made this wheel business investment. That’s dumb! It was one of few financial “Hail Mary’s” I made at that time. Don’t make financial “Hail Mary’s”… it’s dumb; make good, guaranteed financial choices.
Now, go do the work.