For many company owners, the best that can be said of 2002 is that what doesn't kill you makes you stronger. With that thought in mind, Inc deputy editor Karen Dillon sat down with three of the smartest, toughest entrepreneurs we know to talk about the lessons of 2002 and their hopes for 2003. The company founders included Trish Karter, CEO of Dancing Deer Baking Co., a Boston-based company that makes natural baked goods and ships them nationwide; Tony Lillios, cofounder of Speck Product Design, a Palo Alto design and engineering consulting firm; and Chip Conley, CEO of Joie de Vivre Hospitality, which owns 28 hospitality businesses in northern California.

Inc: Can each of you tell us what the past year has been like?

Karter: We started 2002 [fiscal year July-June] in bad shape because we were hit hard with September 11 and travel-industry stuff, and we had a delayed winter holiday weatherwise on the East Coast, as well. Our major customers cut back on their inventory and projections. We have three prongs to our business. One is shipping cakes and cookies out to high-end food stores nationwide. Another is selling direct to consumers. And a third is selling to corporations that use us for gifts and employee- and customer-retention programs. That business totally evaporated in the fall of 2001. But we scrambled and found sales elsewhere to make up the difference.

Conley: For us the year was a lot worse than we'd hoped for, too. In the history of American hotel markets, no hotel market has ever seen a drop in revenues as precipitous as the one in San Francisco and Silicon Valley in the last two years. On average, hotel revenues in San Francisco and Silicon Valley dropped 40% to 45% compared with 2000. We've done better than that. We've been fortunate that our breakeven point is lower than our competition's. As a boutique hotel operator, we tend to have a more loyal clientele. If you think of a metaphor of a pie, and the pie is 40% smaller than what it was two years ago, our slice of the pie is about 8% to 9% larger. But the problem is that the hotel business is a fixed-cost business. So in an environment where you have those precipitous drops and our costs are moderately fixed, our net incomes -- well, they're not incomes anymore, they're losses.

Inc: Did you turn any kind of a profit this year?

Conley: Well, remember, we've got 28 businesses, so you sort of have to look at the individual businesses, because we don't consolidate them up as one P&L for the group. Each one is a separate entity. I can say the following: In some ways we're a little bit of a microcosm for the market. Of the 28 businesses, 2 will show a higher profit this year than last year. About 6 will show a profit that is comparable with last year's, which leaves you 20. Of those, 10 will show [results] that are between 5% and 20% lower than last year's figure. And then the remaining 10 are losing money and are off anywhere from 20% to 80%.

Inc: Do the bottom 10 have anything in common?

Conley: They are the newer businesses, the ones that haven't yet built or established their core customers.

Lillios: Our company got through 2001 almost to the end thinking we were unaffected by the slowdown. Our competitors were having problems; we thought we were more resilient, more diversified. Deeper with our clients, too. We really build strong relationships. But around the end of November, we started to get hit really badly. Then we had our first set of layoffs in February, and culturally it was a very big shock to the system. Coming out of it now, we're stabilized. We're profitable again. But overall, in terms of sales, I think we're down about 30% from last year. And every year before then we had been increasing.

"For all three of us there's something that works, and that is the loyal customer. Because we're small, we can zip around and grab little things opportunistically."

Inc: How optimistic are you allowing yourselves to be for 2003?

Lillios: We've got optimistic views, in the 20% to 30% growth range.

Karter: We're bullish on it. We'll start getting unbullish in the next six weeks if it doesn't [start to] happen. But we're looking for about 50% sales growth in fiscal 2003.

Conley: I'm bearish. I pretty strongly believe that we're going to go into a double-dip recession. And I think it's going to affect consumer confidence like the first one did not. I think the net result is that we're going to be in the most serious economic downturn since the Depression.

Karter: I have a similar view of what's going to happen with the economy. But I don't think we're big enough to necessarily flow with the economy. We're still filling out our distribution in ways that we ought to have already done. For us it's just a matter of executing.

Lillios: We're in a similar camp -- kind of what Chip was talking about, the pie shrinking and his market share increasing. Still, as we're speaking now, our competitors are closing doors -- it's still that brutal to this day. So we really haven't turned the corner in our industry.

Karter: You know, I was thinking, for all three of us there's something that works, and that is the loyal customer. Because we're small, we can zip around and grab little things opportunistically.

Inc: What are you focused on executing better in 2003?

Lillios: Financial reporting. When you are going gangbusters and money is coming in the door, you aren't so careful about planning and forecasting per se. With the downturn, it causes us to be a lot more disciplined.

Inc: Have any of you closed down businesses, fired people?

Conley: We've fired people. We've laid off 150 people out of about 850 employees total. Some of that is seasonal. We actually haven't closed a business yet, but we have looked at selling. We were going to do a major growth initiative in nine new hotels, but now we're only going to do one.

Karter: We haven't had to make those kinds of painful decisions, but we have management-wide focus on systems efficiency and have put enormous amounts of energy into exactly the kinds of things that both Chip and Tony were talking about -- really understanding our costs, looking for every wasted motion, being able to use management-information data quickly and well.

Inc: Can all of you survive another year like this?

Lillios: We can, because we don't have huge fixed costs. Our biggest cost is salaries. We've done our layoffs. We've got efficiency with the employees now where we have people juggling between four- and five-day workweeks based on project loads. We've got this team, kind of, like we're all in this together. We're trying to get everyone back to five-day workweeks. So we have good efficiency going right now where we are profitable. We can scale with the market pretty easily.

"I feel like I've done a good job, but I definitely have been undertooled. I don't have an M.B.A. I don't feel like I have a lot of business experience under my belt."

Inc: Do you think there's another year's worth of efficiencies that you can still find in your company?

Lillios: On our side, sadly to admit, we've never done a sales and marketing effort. We existed for six years without doing one. Eventually, I can see us in the next year hiring somebody who really does that for a living and knows what they're doing. We know that the ceiling would be much higher if we had a better sales system down, a better lead-generation system, and someone who really knows how to handle it.

Inc: Do you think that there is still more you can do, Trish?

Karter: Oh, my God, every day I'm overwhelmed by how much I do badly. I think I'm pretty smart, but there's just enormous room for improvement in every aspect of the way we run our business. And by the time we've really figured it out at this level, we won't be here anymore. We'll be somewhere else, and we'll be trying to figure that out. I can't imagine ever saying to myself that I've got it figured it out now.

Lillios: That's what keeps it exciting, that learning process you're talking about.

Inc: Have any of you had moments during this past year when you doubted yourself? Have you had a moment when you thought you should walk away?

Conley: Yes. I'll admit it, yes.

Lillios: I am doing it, actually.

Inc: What are you doing?

Lillios: I'm taking a sabbatical. The market is so flat and so stable right now that I actually want to take some time off to figure out what dramatic changes we're going to make next. And then I'll come in and just do them like gangbusters. Right now we're still in a mode of trying to change things a little here, a little there. And I think we need something more radical. So right now I'm in the mode of trying to make sure that the day-to-day, slow-growth activities are being managed, and I'm going to separate myself for a while, collect my thoughts, and figure out how we're going to take this to the next level.

Inc: What exactly are you going to do?

Lillios: I have an entrepreneur network that I'm tapped into. [I'm going to] just get into other people's businesses -- do a lot of learning. I feel like I've done a good job, but I definitely have been undertooled. I don't have an M.B.A. I don't feel like I have a lot of business experience under my belt. And through this network of entrepreneurs, I want to tap into that collective brain trust. Sit down with them, have lunch, go into their businesses. Grill them in more detail than I have in the past.

Inc: How long are you planning to be out of the company doing this?

Lillios: Initially, I'm planning about three months. I have two partners who can keep the business running as is.

"The market is so flat and so stable right now that I actually want to take some time off to figure out what dramatic changes we're going to make next. And then I'll come in and just do them like gangbusters."

Inc: Do you think your impulse to do this comes from the fact that you define yourself as the start-up guy or the entrepreneur rather than the manager?

Lillios: Yeah. I mean, I thrive in the rock-and-roll change environment. Let's react to things, let's go, go, go. And right now it's more of a status quo.

Inc: Let me run some other issues past all of you. How big a concern is providing health care for your employees? And how much do you fear that the rising cost is going to erode whatever profits you are able to eke out?

Karter: I don't think that's the issue. We have a pretty generous benefits program. And yeah, health-care costs are rising, but it's just not a big enough piece of the whole picture. It's scary, it's unfortunate, but it's not on my radar screen.

Lillios: I'm in the same camp. I was surprised that in the recent survey of Inc 500 CEOs (see "Growing Nervous"), a surprising number of the chief executives were concerned about it.

Karter: Health care is a tiny number when you look at the overall business expenses. You could double our health-care costs, and it just wouldn't really matter.

Inc: Do you guys all think you've squeezed all the blood that you can out of your employees? Do you think that they are working at absolute maximum capacity?

Karter: I can't imagine that any business owner would feel that that was the case. But there's a point past which you can't push it.

Inc: Are you there yet?

Karter: There's always a mix of people. But I think on the whole we've got a fabulous team, and they're giving it what they've got. At the same time, we're not a sweatshop. We want people to have lives and be happy people.

Inc: Are you fearing war in Iraq could be destructive to your business?

Conley: I was at an antiwar protest in Union Square in San Francisco yesterday. And it was interesting to see the mix of people there, because, of course, this is San Francisco. And San Francisco being what it is, you're going to see all the characters that made the hippie movement. But, you know, what I saw yesterday out there was not just peace activists but also many other hotel managers. That's because we cannot afford another downturn in our industry. There were people out there on a hot Sunday in suits carrying placards saying "Who's going to pay for this?"

Inc: Looking a little more inward, are you guys still having fun?

Karter: Yeah. It's my philosophy about life and work -- it's got to be fun. There are those days, and there's a lot that's not so fun, but on the whole, I'm having a great time.

Conley: My standard for this is very high. When you call a company Joie de Vivre, which means joy of life in French....So my standard for my own success and my sense of well-being in my job are much more driven by my fun and my joy of life than they are by the financial side. Honestly, I've had lots of cognitive dissonance on this for the last year and a half, because it's no fun laying off 150 people. And it's no fun going to scores of investors and ownership groups and giving them bad news consistently. The problem is that on a daily basis I'm doing things I just don't want to be doing. And so I suck it up, but I also have to look outside the workplace for a lot of my joy, which as an entrepreneur is something that a lot of us forget about.

Lillios: I took up doing triathlons two years ago, and I've gotten more and more joy out of that. It's a respite for me.

Karter: I used to run marathons a lot. And lately I've let my [career] and family and kids' life and divorce and all that kind of stuff -- it gets complicated -- sort of kill my athletic program. And I've been thinking that if I have to run between the hours of midnight and 2 a.m., I've got to put that back in for sanity's sake.

Karen Dillon is Inc's deputy editor.

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Published on: Dec 1, 2002