Learning When to Hold ’em and When to Fold ’em

Emotion is a funny thing when it comes to business. Emotion can drive an entrepreneur to overcome tremendous obstacles and succeed, and it can cause bone-headed decisions leading to failure. Generally speaking, business decisions are much better when made without emotion.

Successfully playing poker is an excellent example of decision-making without emotion. Winning or losing does not depend on luck, meaning the cards you are dealt, but rather the ability to focus on the dynamics around you without fear, excitement, disappointment, or delight. It is how you react to the actions of other players, and every hand can be a winner, or can be a loser, based on how you approach the situation.

I want to recount two stories that, in retrospect, taught me how emotion caused me to make a terrible decision based on my perception of being right and self-centeredness. The other involved clearly looking at the facts without concern for my feelings and needs, making the right decision, and avoiding personal disaster.

The new Deputy Minister put me in charge of the Innovation Project funded by Western Economic Diversification in the Brian Mulroney Conservative government. It was a joint effort between Western Canadian manufacturers and the Canadian government to expand and diversify manufacturing in Western Canada through innovation. The program successfully adopted over 100 new products and technologies, generating an estimated $100 million in new economic activity.

One of the inventions the project failed to get commercialized was a device created by a retired Alberta rancher by the name of Art Hamerl. He had developed an ingenious system to allow a farmer to back up his tractor to an implement and automatically connect without getting off the tractor. As innovative as it was, we passed on the idea as we had already successfully licensed a more traditional automatic pin and clevis system developed by a farmer who lived north of Regina, Saskatchewan. This system, called the Power Pin, was licensed to several large farm implement manufacturers. The device developed by Hamerl was a strange contraption involving a ball and socket configuration with the ball mounted on the trailer and the socket on the tow vehicle.

After I left the Innovation Project, Mr. Hamerl approached me to see if I could commercialize his invention. I knew that this design would not succeed in agriculture. Still, I thought there might be a potential market for a quick coupling system for light utility trailers, particularly boat trailers. I acquired the rights to what became known as the Hamerlock Hitch. We developed a scaled-down version where the socket receptacle would fit a square tube hitch receiver on a pickup truck, and we mounted a standard ball hitch on the trailer. As the truck backed up, the guide ramp would engage the ball on the trailer, and the ball would snap into a locked position. It did work slick, but would anyone buy it (backup cameras were still in the future)?

From my experience during the Innovation Project, we learned that there are only two key factors that, if present, would predict product success in the marketplace (a future blog). Success elements could be determined before embarking on significant development. Given that Hamerlock was genuinely unique in its design, I wanted to see what reaction we would get with a key potential market segment – sport fisherman with boat trailers. I arranged to demonstrate the Hamerlock Hitch at a large fishing derby and sportsmen show near Cape Canaveral in Florida through a contact. We mounted the locking socket on a pickup truck and mounted the ball on the boat trailed under a sign that read “How Many People Does it Take to Load Your Boat Trailer.” All we did that day was repeatedly couple and uncouple the trailer.

Well, it caused a sensation. We could have sold dozens and dozens of hitches that day if we had any inventory. I knew for a fact that we had a winning product. People didn’t seem to mind replacing the ball cap on the trailer with a ball. Attendees were willing to pay enough to generate excellent margins when mass-produced.

We raised several million dollars from that show, developed the product, got Department of Transport certification, and collaborated with Glen Lau Productions. We produced television commercials and secured product SKUs for both BassPro and Cabelas. At the time, GLP was the leading filmmaker and marketing agency related to the outdoorsman and sportsman. They produced award-winning wildlife films and had done product promotions for GM, Budweiser, and others. Having GLP on our team was considered a significant victory, sure to generate millions of dollars in sales.

We experimented with a universal adapter plate designed to fit into any standard ball cap on the trailer converting the trailer for the Hamerlock without replacing the ball cap with a ball. Early designs did not stand up to physical testing. It was unclear whether securing DOT certification would be possible. Given that there appeared to be no adverse reaction to replacing the ball cap with a ball on the trailer, we decided to proceed.

GLP had a different opinion. They wanted to hold off launching the product until we could develop the universal adapter. We had already raised several millions of dollars and had inventory in place, and investors were expecting action. I knew that speed to market was critical. GLP went ahead and delayed orders and started promoting the universal adapter for future sales.

GLP’s actions angered me, and I took it as a challenge to my authority. I decided to fire GLP without consulting the board or looking for an alternative solution. Given what was at stake, my decision to fire GLP was short-sighted and dangerous even though I felt I was right that delaying the product launch was a wrong decision.

The fight was on. Several of the board members sided with GLP to take over the Company through a proxy fight. Although this takeover attempt was not going to succeed, I decided to resign as CEO because I was upset that everyone did not rally to my perspective.

Resigning was a horrible mistake. GLP delayed the product launch; the universal adapter could not get DOT certification, and the Company ran out of money and could not raise more. The inventory was seized for unpaid bills and sold off using infomercials. The investors and I lost hundreds of thousands of dollars.

In retrospect, I should have calmly reviewed the facts and weighed out the various options. I am sure I could have reached a compromised solution with GLP with a financial incentive for a two-stage launch. Instead, I let my emotions get the better of me, and I folded when I should have held.

The second story also involves a resignation. This time it potentially saved my career. In the late 1990’s I became involved in a cash-flow finance company providing factoring and purchase order financing to small to medium-sized companies. We financed the business by issuing debentures secured by either accounts receivable or cash.

During the dot.com bubble, stocks, particularly those professing to be taking advantage of the Internet, rose steadily between 1995 and 2000. The NASDAQ composite index rose 582% over that period. Our debenture holders found that they could make terrific returns investing in stocks. Consequently, we had to pay higher and higher rates to keep the debentures in place. At some point, all profits were going to the debt holders.

A solution was to take the company public. As a publicly traded company, we could issue debt instruments held in registered retirement savings accounts. Registered retirement savings accounts would open a potentially large investor base supported by financial planners. We located a publicly traded mining company shell and, through a reverse takeover, vended in the finance company. After securing permission for a chance of business, Ashlar Capital Corporation emerged as a publicly traded company on the TSX Venture Exchange, and financing was done at $2.50 a share. I became the Company’s president.

At this time, share prices of Internet companies were increasing much faster and higher than their peers in the real sector primarily due to speculation caused by the excitement and euphoria of the new internet age. As a result, it led to a market-wide over-valuation of internet firms.

The bubble burst caused market panic through massive sell-offs of dot-com company stocks, driving their values further down. By 2002, investor losses were estimated at around $5 trillion. Consequently, Ashlar shares fell from $2.50 to $.30 per share in less than six months. As president, I was not concerned because the reason to go public was to make it much easier to sell debentures that were not dependent on the Company’s stock price.

However, the board was under intense pressure from investors to do something that would raise the share price. In my view, there was nothing we could do about the stock market sell-off, and we should build our business as planned and let profitability improve the share price over time. The board decided to move in another direction and brought in a merger and acquisitions specialist formerly from Odlum Brown to look at mergers and acquisitions.

Remembering my Hamerlock experience and the fact I needed the job after the losses I incurred, I faced a dilemma. Stay on and go along with the board or do I resign and face an uncertain future. I vowed not to let my feelings, needs, or emotions play a part in my decision. I carefully weighed my options and those of the Company. In doing that, it became clear that I had to resign, which I did.

Resigning proved to be one of the wisest decisions I have ever made. The Company failed at a couple of acquisitions, and it could not raise money and dipped into the trust account, securing the debentures to finance operations. The Company failed and was issued a cease trade order with the officers, and several directors, either fined, received suspensions or were disbarred. For me, I didn’t miss a beat. I went back to a consulting practice full-time, which eventually lead to HealthSpace. It was a good time to fold.

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