Starting Up in a Down Economy

And unlike the owner of an established business, who faces a number of distractions in a recession, Erickson was free to focus on developing the bar, marketing, finding distributors, and so on. When you're starting out, you naturally worry most about the possibility of failure, and so you devote your energy to avoiding it, which means making sales and generating cash.

What people seldom prepare for is the possibility of success, especially when times are tough. (Boom times are different. In the late 1990s, it often seemed that most entrepreneurs were already figuring out how to spend the money from their future IPOs.) And yet success brings with it dangers of its own, as Erickson soon discovered.

Today, Erickson says a "cocktail" of factors made it possible for him to start Clif Bar back in 1991. Without any one of them, he probably would not have launched the business. To begin with, there was the wholesale bakery he had founded in 1986, at the age of 29. He named it Kali's Sweets & Savories, after his grandmother, Kalliope. It made Greek calzones and cookies, all from his mother's recipes. He sold them to specialty food retailers in the Bay Area, such as Peet's Coffee. By 1991, the bakery employed 10 people and was doing close to $300,000 a year in sales but had yet to break even. Erickson estimates that it was losing from $10,000 to $20,000 per year -- a situation that was no doubt aggravated by the recession. He worked nights and drove the delivery truck on Tuesdays and Fridays. By day, he continued to work full time at a bicycle company. To help manage the business, he brought in Lisa Thomas, a bookkeeper for his brother's foundry. Grateful for her involvement, he made her a co-owner of Kali's, with 50 percent of the stock.

Erickson doubts he would have been successful with Clif Bar without the education he received at Kali's. "Your entrepreneurial M.B.A. begins when you start your own business and sign a check, hoping it doesn't bounce," he says. "If Kali's had never happened, I'd probably still be working for a bicycle company."

Of course, that job in the bike industry was another ingredient of the Clif Bar cocktail. "I was involved in industrial design and manufacturing there," he says. "I ran a facility with 40 people. I knew how to manage a P&L. So none of that scared me. And I understood the market that PowerBar had developed, so it wasn't hard to visualize that I could draft off their wheel, as we say in bike racing."

Bike racing was the last part of the cocktail. One weekend in November 1990, a friend invited Erickson on a 125-mile ride that turned out to be 175 miles. He had brought six PowerBars with him. After he ate the fifth one, Erickson found a 7-Eleven, where he devoured half a dozen powdered doughnuts. Right then, he had an epiphany: He knew he could make a better-tasting product.

Erickson spent the next 15 months developing his energy bar while Thomas looked after Kali's. Working with his mother in her kitchen in Oakland, he tried various flavors and used his bike-riding buddies as taste-testers. Meanwhile, he found a bakery that had the necessary equipment to make the bar and was eager for the business. Once he had figured out the bar's size and shape, he went to work on the packaging and kept at it right through the trade show in September 1991, which was a big success. More than a thousand bike shops expressed an interest in carrying Clif Bar.

It took another five months to launch. By then, Erickson had two distribution agreements in place, but his expectations were modest. "PowerBar was doing probably $6 million or $7 million a year at the time," he says. "I'm thinking, Gosh, if we could grab 20 percent of their market share, we could get to $1 million, maybe even $2 million, and laugh all the way to the bank."

In February 1992, Erickson shipped the first 30,000 Clif Bars to his distributors -- and the product took off. Sales totaled $700,000 in the first year and $1.2 million in the second. In 1994, he blew past his initial goal of $2 million in sales. And around that time, he discovered his first costly mistake. It involved his two distributors. Erickson felt their performance was faltering, and he wanted to bring distribution in-house. The problem was, he didn't have a contract with either company. Out of naiveté, haste, or reluctance to spend money on a lawyer, he had done both deals on a handshake, and the distributors' understanding of what they had agreed to was different from his. He wound up settling with both of them at a total cost of $2 million.

The second mistake took a longer time to reveal itself and was much more serious. In launching Clif Bar, Erickson had neglected to set it up as an entity separate from Kali's. As a result, he and Thomas each owned 50 percent of the stock. The full consequences of that decision -- or nondecision -- became apparent in 2000, when Erickson turned down an offer of $120 million for Clif Bar.

Thomas wanted to accept it, and as an equal partner, she could have brought down the company if Erickson didn't accede to her wishes. In the end, parting ways with Thomas cost him more than $80 million, including interest, legal costs, and noncompete fees -- all for a mistake that could have been easily avoided in 1991.

"I could have left her as 50 percent owner of Kali's and told her this was a new business, which it was," Erickson says. "Instead, I just rolled Kali's into Clif Bar."

Lessons in entrepreneurship don't get much more expensive than Gary Erickson's -- at least not for people whose companies survive. Despite the burden of the buyout, Clif Bar managed not only to survive but to prosper. This year, Erickson expects sales to top $200 million. Succession is the big question on his mind these days, although he does wonder about the possible impact of a third recession in 18 years. Somewhere, after all, another start-up could be taking aim at Clif Bar, and a recession might be just what it needs.

-- Bo Burlingham