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BOOKKEEPING

Second-Time Smart

A look at an Inc. 500 CEO, who left his first company because of a rift with his partner, and the lessons he learned.
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In his first business, a young Paul Lyon played tycoon with the money that came rolling in. In his next business, he began to act like a businessman

The capital for Paul Lyon's second start-up came by boat, all that was left of the severance he negotiated when he fled the sinking operation he had cofounded three years before. But for Lyon Design (#168) and the 26 other Inc. 500 businesses whose owners had tried and failed before, failure can be its own reward. To unschooled entrepreneurs like Lyon, learning how not to run one company can be key to the success of the next.

Young Lyon's education began in 1987, at age 26, when he and his ski-racing pal and partner-to-be (we'll call him Traynor) graduated from college and were forced out into the world. Traynor was diverted by a desk toy then popular in Europe, a framed 3D "scenic" made of oily liquid and sand. He decided to manufacture a similar toy for the U.S. market. To support his pal's garage-based initiative, Lyon contributed "several thousand dollars and a slight amount of business training." Then he applied to law school.

He never got there. Instead he helped Traynor build a few prototypes. The two brought them to a local trade show, where buyers ordered 300 at some $12 each. At a second show, in San Francisco, they booked orders for 3,000 more. Converting elements found on a beach to money overnight got Lyon "so excited that I abandoned the idea of law school. I decided I'd rather make money than owe money." To seal that resolve, he accepted 40% of the new company, which the partners named Exotic Sands.

In the company's third year, as local hand labor fashioned sandscapes by the thousands, sales soared to $2.5 million. "For two kids who didn't know anything," Lyon recounts, "it was heady stuff. We thought we were millionaires!" And they spent like millionaires -- on sports cars, houses, golf clubs, the aforementioned yacht . . . the emblems of the nouveau riche. As any student of cash flow could have told them, however, they may have been nouveau but they weren't riche. The gift trade is exceptionally cyclical, with most of its sales squeezed into the four-month holiday season. By January the big spenders had run out of capital with which to restock materials, pay assemblers, satisfy the IRS, and promote the product. "True entrepreneurs never sit down to do a cash-flow plan," Lyon rationalized. "If they stop for that, they have to let too many important things go."

The obvious alternative was bank credit, even if it meant using "everything we owned" as collateral. The partners overdrew their $80,000 line of credit with such abandon that their returned-check charges alone ran more than $1,000 a month. But short-term profligacy didn't faze them. "We've arrived," they assured themselves, "and this product is going to keep us high on the hog forever." As sales and his position on the hog slipped, Lyon began sneaking a ration of each month's receivables to the bank -- enough, eventually, to get out from under the loan.

"What I realize now," Lyon says, "is that you should set aside a portion of revenues solely for the development of new products. But when you're young and dumb, you think, 'Why put cash into something that's not going to make money immediately?"

It was in Lyon's last months with Exotic Sands that he invested "a chunk of change" into an injection mold with which he could fashion a backup product, a key chain of his own design. He brought models to a trade show in May; by August a competitor using offshore suppliers was selling essentially the same item at a price lower than Exotic Sands' cost to manufacture it. To make matters worse, a trusted employee raided the company's secrets and set up a relative in a competing business across town. From there everything tumbled downhill -- except Traynor's salary, which was anchored in the six figures. "There was nothing I could do," lamented the minority owner. Well, there was one thing: in December 1989 Lyon left.

How did Lyon come up with $30,000 to fund his second start-up in 1990? "I sold the boat." Part of the money went to a computer system (his first); the rest, to inventory. Of what? In Lyon's fertile mind was a dazzling catalog of liquid-filled lamps and clocks and such waiting to emerge. But nifty gewgaws like those would get ripped off in a week. "Manufacturing in the States," he says, "I couldn't compete. And patents and trademarks are expensive, not only to get but also to protect." The cheap way to protect yourself, says Lyon, is to offer your product at an unbeatable price and back it with plant capacity.

Lyon took off for Taiwan, looking for the suppliers who had stolen his key-chain design. The meeting proved surprisingly cordial. "They figured, 'This is fantastic. Instead of our copying someone's idea and picking up residual sales, we've got the original guy right here. Let's back him." For the next two years "vendors financed my company far better than banks did," says Lyon. "When I got into cash crunches, they carried me."

To tighten the bond with his vendors, Lyon took a pair of factory owners from Taiwan camping in the mountains of Utah. Today most of the 60 products Lyon Design sells to retailers come from the Far East.

But Lyon has yet to master planning. Instead he invites M.B.A. students to use his business as a case study in exchange for their help. The credibility of their forecasts has solidified Lyon's relationship with the bank. When Exotic Sands had a cash-flow problem, it was always immediate. The partners would go to the bank the week the money was needed, "and the banker would laugh at us," recalls Lyon. Now, he boasts, "I go six months in advance and tell them, 'Here's what I'm looking for. What do you need for me to get the loan through?" One result: Lyon Design has a $500,000-plus line of credit.

Today a vice-president owns 22% of the company, and other interests control 19% -- leaving Lyon with 59%. "I'll never, ever go under 50%," Lyon swears.

Despite a torrid growth rate of 1,233% over five years, Lyon Design's expansion has been controlled. It was only recently that Lyon asked a third Taiwanese to the United States. "Sure," the man accepted. "But promise you won't take me camping."

Last updated: Oct 15, 1995




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