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The Smartest Dumb Thing I Ever Did

January 21, 2012

Caterina Fake, Chip Conley, Dan Ariely, Susan Gregg Koger, and others on their biggest–and most brilliant–mistakes.

The Smartest Dumb Thing I Ever Did

Clockwise from top left: Caterina Fake (Flickr/Hunch), Roy Rubin (Magento), Ted King (Liquigas-Cannondale Cycling), Chip Conley (Joie de Vivre), Susan Gregg Kroger (ModCloth), and Dan Ariely

Success is never inevitable: Seemingly smart decisions often turn out to be disastrous, and sometimes what appear to be the worst decisions turn out to be pivotal to eventual success.

With that premise in mind I asked a few very smart—and very successful—people to share the smartest dumb thing they ever did.

It’s an eclectic bunch: a number of entrepreneurs, an executive producer/screenwriter, a leading academic/bestselling author, and a professional athlete.

Why get input from such a wide range of individuals? Entrepreneurs aren’t just people who start companies. Everyone is an entrepreneur, because all of us are in the “business” of ourselves. No matter what your field or profession, hopefully you’ll find at least one story you can relate to.

And as you’ll see not all the stories are about business—because life, even for hard-core entrepreneurs, should always be about more than business.

Chip Conley, founder of Joie de Vivre hotels

I’ve got enough examples to fill a large volume set of books, but the best one I can give is how I started my company, even though that was many years ago.

I was 25 years old and facing a mid-life crisis. Being the type-A, hyper-achiever I was, I’d gone directly from Stanford undergrad into the MBA program and was the youngest guy in my class.

While I was offered many conventional MBA jobs out of business school, I took a flyer and went to work for a maverick commercial real estate developer in San Francisco as the project manager of a huge historic renovation, converting a Masonic Temple into an office building.

This job paid me one-third of all my other offers, had me headquartered in a basement, and had me way over my head overseeing a construction staff of a couple hundred people and a leasing staff as well. Within a year it was clear I might have taken the wrong path, since the job wasn’t a calling. It was way more like a job and not nearly as creative as I had expected.

So, as is true for many of us, I started looking for my calling elsewhere: writing screenplays and learning how to become a massage therapist, all while keeping my day job.

It was on my 26th birthday that I finished penning my business plan to create a boutique hotel company, as boutique hotels were just starting to open in the U.S. in the mid-80s. I decided to call it Joie de Vivre since I was looking for “joy of life,” and I wanted to provide that to our employees and customers as well.

Because I had a tiny budget, having raised $1 million from friends and family, my only choice was to buy San Francisco’s notorious no-tell motel, the Caravan Lodge, a bankrupt property on a land lease in a bad neighborhood.

The biggest corporate account was Vinny and his girls.

All my MBA friends thought I’d lost my marbles. One of them told me that I was ruining my resume (horror of horrors). But there was something in me that loved this forlorn, foreclosed motel, so I renamed it The Phoenix for the mythical bird that rose from its own ashes.

That venture allowed me to tap into my creativity and do a left-brain/right-brain tango as an entrepreneur. With a tiny renovation budget (inviting friends to help me paint the place with weekly kegs next to the pool), we launched The Phoenix and within a year it became an infamous rock ‘n roll hotel where everyone from David Bowie to Linda Ronstadt to Johnny Rotten stayed.

And this “little engine that could” story helped parlay Joie de Vivre into the second largest boutique hotelier in the U.S.

As many prospective investors said over the years, if you could make that first hotel investment work, you can make anything work.

Chip Conley founded Joie de Vivre in 1987. He’s also a speaker and author, including the recently published Emotional Equations: Simple Truths for Creating Happiness and Success.

Derek Sivers, founder of CD Baby and HostBaby

Ever since I was a teenager, my dad would occasionally send me things to sign, like things for the family business, which I partly owned. I didn’t understand the complexities of it all, and didn’t need to, so I’d just sign without question.

In 1994, as I was recording my first album, I needed to borrow $20,000 to buy studio equipment. My dad said, “Instead of lending you money, start a corporation. Then the family business can buy shares in your corporation.”

So I did. Because my band was called Hit Me, I called the company Hit Media Inc.

My dad’s company bought some shares and that helped me finish my album and continue to run my record studio at a profit.

Four years later I was living in Woodstock, New York, and I started an online music store called CD Baby as a hobby.

The first time I got a check payable to “CD Baby” I took it to the bank and told the bank teller, “I need to set this up as a new business, so let’s open a new business account.”

She said, “Oh, you don’t need to do that. You can just make it a Doing Business As on your Hit Media account.” (At that time, Hit Media was a recording studio and booking agency.) It seemed a little strange since CD Baby was definitely a new business, but it saved ten minutes and $100, so I said okay.

Four years later CD Baby was doing really well, with a few million dollars in sales and probably half a million dollars in net profits. I paid my dad back the $20,000 I had borrowed.

Then I called my accountant in January and said, “I got all the books balanced. Should we file early this year?”

He said, “Oh, you don’t need to file. CD Baby is just a line item on your dad’s company’s tax return.”

I said, “Uh… what?”

“You didn’t know that your dad’s company owns 90 percent of CD Baby?” he asked

“Uh… what?”

“Maybe you should talk to your dad,” he said.

It turned out one of those pieces of paper I signed without question had sold 90 percent of the shares of Hit Media Inc. to my dad’s company. That would have been fine, except the bank teller advised me to make CD Baby a DBA of Hit Media, so now that meant my dad’s company owned 90 percent of CD Baby, too.

Oh, what a sinking feeling.

I couldn’t be mad at my dad. He was doing me a favor in 1994 and thought I understood the deal. Nobody thought my little hobby was going to turn into a multimillion-dollar company. Not even me.

It was my fault for not reading what I signed. And it was my fault for letting a bank teller’s quick advice make such a major decision for my business structure.

What made it even worse is that I couldn’t just buy those shares back for the original $20,000. The IRS wouldn’t allow that. The only way was to pay full market value as determined by an outside valuation company.

In the end, I had to pay $3.3 million dollars to buy back that 90 percent. That hurt. But things didn’t turn out so bad after all.

A year later I sold the company for $22 million.

Derek Sivers founded CD Baby, an online CD store for independent musicians, and is a founder of HostBaby, a company providing websites, promotional tools, and other services for independent musicians, authors, and artists.

Susan Gregg Koger, co-founder of ModCloth

I started working on ModCloth full-time when I graduated from Carnegie Mellon University in 2006.

However, Eric (my co-founder and my husband) was still completing his MBA so we had very little working capital. In order to fund our first collection of inventory we opened multiple credit cards with introductory zero-percent interest periods. When one card ran out we transferred the balance to the next.

At one point we had over $60,000 in personal credit card debt between us—not the smartest thing ever, especially with looming student loan repayments.

It worked out for the best though; the inventory we had invested in sold very quickly and allowed us to experience massive growth during that time period. This set us up to have real revenues and a respectable customer base by the time we raised our first institutional round of funding. Today ModCloth is a thriving business with over 270 employees.

Susan Gregg Koger is the Chief Creative Officer and co-founder of ModCloth, an online retailer of independent designer fashion and decor.  She was the Inc. #2 Top Entrepreneur under 30 and was named a White House Champion of Change in 2011.

Michael Hirst, screenwriter

In the 1970s I had almost become a professional student, attending the London School of Economics, the University of Nottingham, and Trinity College, Oxford, where by the end of the decade I was writing a thesis on the short stories of Henry James. This institutional immersion was, however, exactly the right preparation for my proposed career as a professional academic—a career I had long imagined for myself and never questioned.

The one blip had been a short period when my government grant had run out and I’d been forced to work at a publisher, reading what they called the “slush pile” (unsolicited manuscripts to you and me) and those dreadful film and TV tie-in books. It did though give me the opportunity to meet interesting people, including the British film director Nicolas Roeg (“Don’t Look Now,” “The Man Who Fell To Earth”). Nic read some of my short stories, liked them, and asked whether I’d ever be interested in writing a movie script. I said I had no idea how to do such a thing, and in any case I had my career to think about.

In 1980 a prestigious American university offered me the chance to complete my thesis there as well as do some teaching. It was understood that, in all probability, this arrangement would lead in time to the offer of a permanent lectureship.

That summer I went to New York to prepare for my new life. I loved New York and was excited by the idea of finally attaining a position I had dreamed of for so long. While I was there Nic Roeg sent me a telegram (yes, they were still around) offering me a screenwriting gig and asking me to return to London to work with him. I might not have given this much of a thought except Nic was the most fascinating man I had ever met and I somehow felt that if I lost this connection with him my life—for unknown reasons—would turn out to be a lot poorer.

And perhaps there was something else. The offer made me question what I really wanted from life for the first time. Most of us, I guess, follow the lines of least resistance and rarely make real decisions, and that was certainly true of me. So it was scary to even contemplate what seemed, in a sense, like walking away from my own life story.

At the same time, I realized that I would be giving up what amounted to tenure for life, and a comfortable world in which I could be both a critic and a writer. As an academic, I didn’t need to give up writing. I was also in love with a girl in New York.

But I did give it up. I walked away. I came back to London—where I found that, although Nic did have a project, he had no source of funding for either the production or even the screenplay. So I had come back to poverty, and few expectations.

Somehow the money was scraped together for me to get writing. I loved working with Nic and I learned more about—well, everything, especially myself—during the period we worked together. He’s still my mentor and best friend.

Oh, and the film we wrote together never got made. How like life!

Michael Hirst is the screenwriter of Elizabeth and Elizabeth: The Golden Age, wrote and executive produced the Showtime series The Tudors, and among other projects is currently working on a TV series about the Vikings, another called “The Drivers” about the battle between Enzo Ferrari and Henry Ford II for the soul of motor racing in the 1960s, a script about Mary, Queen of Scots, and a miniseries about Madame Tussaud.


Caterina Fake, co-founder of Flickr and Hunch

My family felt strongly that I should be, say, a banker, or a lawyer, or an executive. They wanted me to get a solid, stable job that carried an imprimatur of success.

I tried that path.  I quit a job at a bank, quit a job at an insurance company, and quit a job on Wall Street, but then spent most of my time after college doing crazy stuff. Many people around me did not approve of my life decisions. I worked in a dive shop, backpacked around South America… I did lots of things that seemed aimless and not remunerative.

Then when I was twenty-seven I taught myself Web design and got into Web development. I really enjoyed it. It was great!

So I got a job at a Web agency, but after a year I quit that job too and went out on my own.

Most of my life choices seemed unorthodox but they were all good for me. When you are in your early ‘20s, everyone gives you all this advice about how to live your life. (“I just want to say one word to you. Plastics.”)

Those people mean well, but you can never find your vocation—which should mean, in the true sense of the word, your calling—until you first try a lot of things.

And quit what doesn’t feel right.

That’s probably the smartest dumb thing I’ve done. No matter how far you’ve gone down the wrong road, turn back. Never use sunk costs to drive your decisions. If you’ve just spent $150k on law school and you realize you don’t want to be a lawyer, don’t be a lawyer.

People around you will say, “How can you quit after investing all that time and money? Are you crazy? That’s stupid!”

What’s crazy and stupid is continuing to do something that, in your heart, you know is not what you want to do.

Caterina Fake co-founded Flickr, co-founded Hunch, is the Chairman of the Board of Etsy, is a board member of Creative Commons, and is a founder/partner of Founder Collective.


Leerom Segal, founder of Klick

We’ve been building our war chest every year since our company was founded. (We do Web apps, analytics, and marketing.) A few years ago, we considered spending some of our surplus on an acquisition, and nearly acquired a mobile marketing company.

In the end we passed because their revenue concentration—three major clients—was unsettlingly high by our standards. Within six months, passing on the deal seemed like an epic mistake to everyone because that company had continued to grow and perform extremely well.

But that mistake also worked out really well, because in time we recognized how profoundly important it is to grow a company culture the right way. Obviously not all growth is created equal. But why organic growth is so important in the agency world is not well understood. Everyone talks about growth, and that’s because intuitively we all recognize growth as the engine that drives opportunities for ambitious talent.

Even so, growth by acquisition is totally artificial in that regard.

Take, for example, a 100-person agency that experiences 50 percent growth; compare that to a 100-person agency that acquires a 50-person agency. In the former example 50 new positions are created along with numerous promotions and cross-pollination opportunities for the original 100 employees—and eventually for those in new positions too.

In the acquisition scenario two different groups get cobbled together. No new positions are created, no real opportunities for advancement, and an incredible amount of cultural change that distracts rather than enhances the company.

Our dumb decision turned out to be smart when we invested those same funds to build up the capability of our own organization. Ultimately the dollar-for-dollar gains were comparable—and our employees, and our company culture, benefited even more.

Leerom Segal is a founder of Klick, the Canadian web application development, analytics, and marketing agency. Klick has been named one of Canada’s 50 Best Managed Companies and has appeared multiple times on the Deloitte Technology Fast 500.


Ted King, professional cyclist

I’m a graduate of Middlebury College. A quarter century ago the school was particularly renowned for its extensive foreign language programs abroad, so I’m still frequently asked, “Oh, you went to Middlebury—where did you study abroad?”

In fairness, I studied Spanish and took two days of French, but in the end I was much more objective and finished school as an economics and mathematics major.

Middlebury is also where I found my career and fell in love with cycling. With the winter months of December through March being the most important in building the foundation to cycling fitness for the ensuing nine-month race season, believe it or not skidding across Vermont’s frigid Green Mountain tundra is not the most conducive place to ride a bike that time of year.

So when I decided to temporarily withdraw from school (with full intention of returning!) and enrolled for my semester “abroad” at the University of Arizona, I got more than my fair share of flak from friends, classmates, family, advisers, and professors.

That spring season—balancing school with ample warm weather training—turned out to be the best of my fledgling amateur career and set the benchmark for my rise through the ranks. And seven years into my professional career, now living in Italy and racing throughout the world, I can also say that I’ve seen more countries and studied more languages than nearly all my classmates.

Ted King is a professional cyclist for Liquigas-Cannondale Cycling. He’s raced professionally in Europe and the U.S., has ridden the Giro d’Italia twice, and writes a regular column for Bicycling magazine.


Dan Ariely, bestselling author

Quite a few years ago I wanted to write a book that would appeal to both academic and general audiences.

The title was going to be Dining Without Crumbs: The Art of Eating Over the Sink. It would be a cookbook for the single male, and through it I planned to use the kitchen as a metaphor for life. After all, in the kitchen we create, we destroy, we experiment, we try different things… the kitchen is a great laboratory for thinking about life in general.

I wrote an outline and a couple of chapters and showed it to a few book agents. Each felt it was a terrible idea. They said, “It’s not a cookbook, it’s not a humor book, it’s not a social science book—so no one will publish it.”

I kept trying for another two years. Book agents kept saying, “This is funny, this is well written… but not useful.” Since I had a few connections I was able to reach quite a few high-caliber book agents, but none was interested.

Eventually one agent said, “If you really want to publish this, you should first write a book about your research.” That was the last thing I wanted to hear. The whole point of writing the cookbook was to write about my research in a different way. I knew how to write about research, and I wanted to do something different and a little less constrained.

I thought, “How ridiculous is it that I want to write this cookbook, but in order to do that I’ll have to publish another book I don’t really want to write?” Still, I had a sabbatical coming up, and since I’d dedicated two years to the cookbook project…

I still wasn’t thrilled, though, and the agent said, “Keep in mind it really doesn’t matter how many copies your research book sells. As long as you publish something, it doesn’t matter if it only sells a few thousand copies. Then you can publish your cookbook.”

So I spent a year working on a book I thought would be a stepping-stone to writing the cookbook. I called that book Predictably Irrational. A few more than a few thousand people read it, and that book it changed my life in amazing ways—all from making a decision I didn’t want to make in order to be able to do what I really wanted to do.

I had no idea that “sacrifice” would change my life in so many ways.

I’m still working on the cookbook.

Dan Ariely is a Professor of Psychology and Behavioral Economics at Duke University, a founding member of the Center for Advanced Hindsight, and the author of two bestsellers, Predictably Irrational and The Upside of Irrationality.


Roy Rubin, co-founder and CEO of Magento

In 2001 I started a Web development business out of my bedroom. Like many growing service providers we did nearly everything. Whatever clients wanted—site design, SEO, shopping carts, etc.—our answer was always “yes.”

Within a couple of years we started to focus on e-commerce; soon, we had more e-commerce business than we could handle. Customers were desperate for help bringing their stores online, and we had learned how to build robust, great-looking stores that helped move product.

By 2006 our business had grown dramatically, but with growth came frustrations. Our customers were frustrated with the limited functionality of the existing open-source e-commerce platforms. They were frustrated when updates to their platform would invalidate their site customizations. Most of all, we found that customers wanted to be able to provide input, to collaborate… to have a greater voice when it came to the platforms that were central to their success.

And we were frustrated as well. As developers, we found working with the existing open source e-commerce options incredibly frustrating. We could have kept cranking out profitable projects for years, but the work was not fun anymore. Good developers don’t have the patience to work with bad platforms. We knew there had to be a better way.

So we decided to radically change the direction of our business by focusing our energies on creating a new open source e-commerce platform. That was a huge—and counterintuitive—decision. For one thing, it required turning down profitable work to focus on creating the platform. What’s more, we were creating a free product and we didn’t have a clear idea about how we would ultimately monetize what we were creating.

Then we decided, also counter to conventional wisdom, to be completely transparent about our development work. We started a blog at the beginning of our effort, asking for input and tapping into a growing community of developers and merchants who were hungry for something new. Rather than compete with this community, we wanted to empower it. We stayed true to the spirit of open source, and the marketplace responded.

Today, our platform—Magento—is the leading open source e-commerce platform worldwide.

I never planned to build a huge company. I didn’t set out to disrupt the e-commerce world. There was no plan. Is that the smartest way to build a business? Maybe not.

Our success happened organically, one opportunity and one counterintuitive decision at a time. We listened to the frustrations of our customers, indulged our desire to build something better, and took a chance that our drive and determination would see us through.

As it turns out that was the smartest decision we could have made.

Roy Rubin is the co-founder and CEO of Magento, creators of the world’s leading open source e-commerce platform. Magento was recently acquired by eBay. Terms were not disclosed but some news reports pegged the deal at more than $180 million.

Jeff Haden

Jeff Haden learned much of what he knows about business and technology as he worked his way up in the manufacturing industry from forklift driver to manager of a 250-employee book plant. Everything else he picks up from ghostwriting books for some of the smartest innovators and leaders he knows in business. He has written more than 30 non-fiction books, including four Business and Investing titles that reached #1 on Amazon’s bestseller list. He’d tell you which ones, but then he’d have to kill you.

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