The Story Of A Failed Startup And A Founder Driven To Suicide
Both Sides of the Table
A few months ago, on Sunday, January 27, an entrepreneur named
At 11:12 PM, the police found Sherman's body.He was in his car on Witch Mountain Road, near Mount Charleston, Nevada, about 25 miles from Las Vegas. Sherman had been shot in the head.
The Clark County coroner's office determined that Sherman had killed himself. It was five days before his 48th birthday.News of Sherman's
Just a few days after Sherman's suicide, his company,
A couple of weeks later, Ecomom closed its doors. The prosaic reason: The company's liabilities were greater than its assets.Put more simply, Ecomom was broke. The 28-person startup — which had just raised $5 million six months earlier and more than $12 million total — ran out of cash. And no one left at the company seemed to know where it had gone.
Over the past six weeks, we have interviewed more than a dozen people close to Jody Sherman and his startup about what happened in those final months. They're colleagues, friends, advisors, investors and confidantes. Many of them spoke on the condition of anonymity.
All are shocked by what happened. Many feel duped. And everyone was left wondering:Who was Jody Sherman?
Jody Sherman was electric. His 5'9 frame was lengthened two inches by a mane of untamed black curls that shot out wildly from his head, like his finger was perpetually stuck in a socket.
"He was the Willy Wonka of the startup world," a friend says.Sherman had a tattoo on his wrist that read "I am awesome." It was a visible reminder of his need to be great. Friends say Sherman had had a hard life and had had to overcome a lot, which made him exceptionally driven. Money was always a problem for Sherman, and poor decisions around it seemed to dictate his life.
One childhood friend recalled a time when Sherman committed insurance fraud. He described driving on a highway with Sherman when they were 16. Suddenly, Sherman told his friend to "buckle up." He slammed on the brakes and caused an accident. Later, the friend says, Sherman would collect thousands of dollars from insurance companies for the self-inflicted injuries.
Instead of going to college, Sherman joined the Navy. When he left in 1988, he became a part of the tech scene in California. A career high point was selling a company to what eventually became NBCi, an Internet spinoff of the broadcast network. There, Sherman rose to become a vice president.Sherman then created a new company, Comedy World, which was a producer of online talk shows. It fizzled after investor enthusiasm for the Internet vanished during the dotcom bust.
Sherman bounced back, investing in companies and starting another one. His next startup was a charter plane company he started with three co-founders. The company was eventually acquired by Virgin. Sherman remained at Virgin for two years before his aviation program was shut down.
"The whole thing with Virgin Charter was hard because some of the business went belly up, and it was basically a failure," a source says.But while at Virgin, Sherman was inspired to try again. He decided that this time, he'd start a company that improved the world.
Sherman noticed women discussing child-care problems all around him. Although he didn't have children of his own, he felt like helping mothers pick safe items for their children was a worthy cause, and a problem he was capable of solving.He started Sprout Baby, a site that sold affordable, healthy baby food. This was the first iteration of the company that would become Sherman's last startup, Ecomom.
Both Sides of the Table
Raising funds at any cost
Both Sides of the Table
One weakness of this approach is that an individual angel won't have a large stake in a company, so that person won't have a strong incentive to get closely involved and make the company a success.
Ecomom was never an easy sell as an investment, even to angel investors.
"No one was in love with the idea of a dude with no kids starting an ecommerce company for moms," Sherman wrote to 500Startups, an email list for entrepreneurs.
"I really liked the guy," an investor recalls. "I thought he was awesome. But I thought his business was a disaster."Like all good entrepreneurs, Sherman was persistent, and one by one he changed minds. In the end, Sherman persuaded 65 investors to back Ecomom.
"I didn’t so much want to see a baby-products company make money as I wanted to see [him] succeed," Sherman's investor and friend Mark Suster recently wrote. "[He] had some magic dust."
Sherman hustled his way to $2 million in funding, collecting $25,000 here and $50,000 there.While having so many investors as supporters was initially good for Ecomom, it eventually became a burden.
Despite his many friends and backers, Sherman ultimately bore the burden of Ecomom's success or failure alone.
While chasing down money for Ecomom, Sherman came across Tony Hsieh, CEO of Zappos.
Taking a gamble on Las Vegas
Hsieh had built Zappos into a shoe business that Amazon acquired for $1.2 billion.Like Sherman, Hsieh went through the dot-com bust. But he had managed to steer Zappos through it. While many observers wrote off online retailing, Hsieh quietly grew his business into a giant. And in the process, he proved that e-commerce could be both cool and profitable. This inspired a wave of new startups like Ecomom. Hsieh decided to use a hefty chunk of his fortune to build up a tech scene in downtown Las Vegas.
To lure companies to Vegas, Hsieh helped set up an investment vehicle, VegasTechFund. This fund invests in startups under one condition: They must contribute to the downtown Vegas project. Often, that means the companies must move to Vegas.
Sherman was deeply rooted in the Los Angeles tech scene, where he had a network of hundreds, if not thousands, of friends. But Hsieh was a master in e-commerce, and he could be both a good mentor and investor to Ecomom. So when VegasTechFund offered to invest in Ecomom, Sherman went for it.In December 2011, Sherman relocated his company to Las Vegas. He had to do this without his wife, who stayed behind in California for the next eight months taking classes.
Although Sherman was vocally supportive of the tech scene in Vegas, close friends say he was never happy there.
A mountain of personal debt and financial trouble
In December 2011, as he was moving the company to Las Vegas, Sherman closed another round of financing for Ecomom. It included VegasTechFund and a number of other investors. The round netted Ecomom $4 million.Sherman was good at raising money. But he struggled to make smart financial decisions, both in his personal life and in business, which were closely intertwined.
At the time of his death, friends say Sherman had hardly anything left in his personal or business accounts. "I knew he was having a lot of financial trouble," one says.Sherman and his closest friends would lend each other money from time to time when they were in a pinch, sometimes large amounts. Sherman always promised to pay his friends back in a matter of months, but he still had outstanding loans when he died.
Sherman wasn't always prompt about paying taxes either. In 1995, he received a federal tax bill for $27,838. In 2010, he received another one for $72,000.Friends say Sherman felt that if you ignored the bills for long enough, they'd go away. In the case of tax bills, however, they don't. Instead, the government can put liens on your assets, freezing accounts and claiming your personal property until the debt is paid off. Despite his troubled history of managing money, Sherman was directly responsible for Ecomom's finances. He demanded that it be that way, not even sharing the company's financial information with his co-founder, Emily Blakeney. Sources admit that was strange in retrospect.
"There wasn't ever full disclosure, and that leads me to believe there was a reason he didn't want anyone to have full disclosure," says a source. "If you have nothing to hide, you're an open book."
Sources say Sherman was the only person with access to the company's bank account and invoices. Only he knew how much cash Ecomom was using up every month. He put the company's inventory on his credit card, a black American Express, which caused him to go into deeper personal debt. He refused to get a corporate card, despite complaining to colleagues when AmEx would call and question company expenses.At times, Sherman admitted to racking up a couple hundred thousand dollars in personal credit-card debt.
In August 2012, Sherman raised another $4.7 million for Ecomom. Around that time, he also quietly raised $1 million of securitized debt. Cue Ball Capital, a Boston-based venture-capital firm, led the round. Partner John Hamel joined Ecomom's board.
Something happened during that fundraising process that changed Sherman.Before the fundraising, Sherman would push himself and others to raise as much money as possible for their businesses. After the financing closed, he began referring to venture capital as a "fraud" and a "sham."
"He said, 'This is one of the hardest things I've ever had to do. And I hope to not have to raise more money for a very long time,'" a source recalls.Another source also recalled Sherman saying something alarming about this last round:
"He said, 'I had no business raising that last round of financing. I hadn't made our metrics or our terms—not anything near it. But I got it done.'"When asked what Sherman meant by "got it done," the source wasn't sure. Friends and former colleagues of Sherman's say he never seemed to lie. One described Sherman as "compulsively honest." But he could word the truth in a funny way.
A source asked Sherman a few months before he died about Ecomom's numbers. The numbers and metrics that Sherman revealed were going up and to the right.
"Jody told me, 'We're aggressively pursuing a new ad strategy that's paying off,'" the source recalls. Later, it became clear that this was true only because of a marketing push that was temporary and unsustainable.
By the time of Sherman's death, five months after raising $5.7 million, Ecomom was suddenly out of cash.
Dangerous deals and missing millions
Where did the millions go?
On the day he died, only Sherman knew.Even board member John Hamel and co-founder Emily Blakeney were blindsided, by both the company's condition and the suicide. It took several days after Sherman's death to sort out the company's financial state.
After a review of the state of the business, it became clear that the management team and the board had tough decisions to make. Everyone was surprised to discover the precipitous increase in losses over the past 2-3 months. The company’s liabilities appear to be greater than its assets and this financial burden makes it difficult to continue down the current path. In light of recent events, given the $1 million securitized bank note and the company’s dwindling cash position, the board has been in discussions with the bank to determine the next steps. Without a current prospect of further cash infusion into the company, the bank will likely ask to sweep most of the company’s cash very soon and take steps to liquidate the remaining inventory and sell assets to pay off the bank debt. At this point, it appears that the company has no other choice than to wind-down the business.Given the current liabilities, the only way to keep the company afloat would be with a white knight contribution of $2-3 million to pay down liabilities and to pivot the business to a more profitable business model that has been considered.
Nucci's email makes it clear that the company ran out of cash. After sending the email, Ecomom updated its website to say it had "entered into an Assignment for the Benefit of the Creditors," an alternative to filing for bankruptcy.The California Secretary of State's directory confirms Ecomom's status. The company lists as its agent Michael Maidy, a co-founder of Sherwood Partners. Sherwood specializes in winding down technology startups and other companies. There were a couple other people with insight into Ecomom's finances: an outside accountant from Optima Consulting named Darin Marinov, and an internal comptroller. Marinov declined to comment through lawyers.
Others have told us neither of them knew how bad the financial situation at Ecomom was.
There was about $4 million in the company bank account in December, 2012. By the end of January, there was $400,000 or less, sources say.Where did it all go?
An October meeting and the disastrous attempt to save Sherman's job
Ecomom was known for giving customers great discounts through daily deal sites like Groupon. Customers loved Ecomom for its generosity and customer service.
While this benefited Ecomom's customers, the deals ate away at the company's bank account.It's easy to think of daily deals and vouchers as simple promotions. But the financial impact on the businesses that use them goes beyond just cutting a little off the top.
Some struggling businesses rely on online discount-coupons as a source of quick cash flow. These can be a form of financing, though they come at a heavy cost. First, the merchandise is heavily discounted, which reduces the profit margin. Then the discounted amount is split between the seller and the daily-deal site.Companies with a lot of cash can afford to lure in the same customers through deals multiple times until they finally become loyal full-price customers. Well-funded companies can also afford to lose money on deals temporarily. But Ecomom, relatively speaking, wasn't a well-funded company.
One of the leaders of the new breed of e-commerce companies, for example, Gilt Groupe, has raised more than $220 million. E-commerce design site Fab has raised $171 million. Ecomom had only raised $12 million ($11 million in equity plus the $1 million securitized bank note).If vouchers were costly, why did Ecomom use them so much? And what happened during the fourth quarter that sunk the company? In October of last year, Jody Sherman sat down for a meeting with his executive team.
"What is our revenue going to be in 2012?" He asked.
About $2.3 million, he was told. Sherman mulled this over and replied that that wasn't acceptable. "The board is going to fire me if we don't do $4 million," he said. So everyone put their heads together, believing what Sherman had often told many of them:"Never worry about the company's cash situation. I have it under control."
They came away with a sure-fire way to grow top-line revenue. They would create a 40 percent holiday discount that could be paired with a voucher for an even deeper price cut. The deal would be too good to pass up.
And it was.By the end of the year, the company had generated $3.7 million in total revenue, with more than $1 million coming from the aggressive sale. Of course, this was extremely expensive for the company's bottom line.
An elaborate scam in Guatemala?
During the fourth quarter of 2012 — the last few months of his life — Jody Sherman spent an unusual amount of time in Guatemala.He told people this was because he was opening another office in Central America at the advice of one of his investors, People Fund. This office, he said, would make the business cheaper to operate.
The office did open and it hired a few junior-level people. Jody flew down at least once per month, sometimes scheduling quick trips and submitting expenses for large amounts of money to the company.Part of the reason Sherman was following PeopleFund's advice was because the firm was evaluating whether to help Ecomom lower their development costs by moving some of the costs to Guatemala, where PeopleFund's portfolio companies have over 400 web developers. These services, for which PeopleFund might have been compensated with Ecomom stock, never went anywhere. He became desperate for money.
The desperation, one person tells us, led Sherman into the hands of a scam.
While in Central America, Sherman secretly sought out John McAfee, founder of McAfee anti-virus software. This was around the time when McAfee was publicly struggling with the Belize and Guatemalan authorities.McAfee now says that, over a series of months, Sherman was swindled in an elaborate hoax.
According to McAfee, Sherman was told that if he made an initial investment in a shady local scheme, he would be reimbursed for significantly more. And while Sherman upheld his end of the bargain, he was never repaid. We have not been able to confirm this story.
"I told Jody that [hoaxers] were bullshitting and to just go home and forget about it," McAfee explained via email. "'It's a scam as old as mankind' I told him. 'But they won't do anything. And forget your original payment. You won't get it back.' I told him to look at it as an expensive piece of education ... I am 67 years old and experienced enough not to succumb to a bribe request, yet my life was nearly destroyed through retribution in spite of my experience. Jody was young and succumbed to greed — ignoring my advice to 'leave Guatemala now and don't return.'"McAfee is renowned for making up crazy stories, so it's anyone's guess whether Sherman really got swindled. But a source confirms the pair did meet abroad.
Is a startup worth life?
Even for those who knew Sherman's sometimes volatile personality, his death came as a shock. And for a man who had overcome a lot of hardship in his life, one question that followed his suicide was "why?"Some close to Sherman wonder if his death was not a suicide. They point out that there was no note, and that Sherman's ID was found on the street near his house on Shadow Lane, not at the scene of his death. But the coroner confirmed multiple times that Sherman's death came at his own hand.
So what did drive Jody Sherman to kill himself?As is often the case with suicides, no one knows for certain. Sherman had battled clinical depression, and his mind may have been clouded by marijuana, which he often smoked to self-medicate. What is clear is that he was under tremendous stress financially and professionally. In the aftermath of Sherman's death, it was the latter story that dominated the conversation.
In a social media age where word of success and failure travels fast, entrepreneurs say it's harder than ever to run a company — and it's harder than ever to fail.
"Founders are a mess right now," one tech entrepreneur told me, citing examples of friends breaking out in hives during fundraising rounds, having heart palpitations, or needing frequent therapy sessions for stress-related problems."No one talks about it until you talk about it. They'll say, 'I had that same rash.' I do think it's harder now, because a lot more press and media is shared."
"In the past, failure was very contained," another entrepreneur said. "When you failed, you felt bad around your family, the people you raised money from, but it wasn't as public. Failure in an era of social media and social video and global events is a very public thing. Jody put himself out there this time and became very respected for what he was doing. That possibility of very public shame is something that didn't exist before."
For a founder like Sherman, who was known by thousands in the tech world as a friend, advisor, and role model, public failure would have meant letting people who looked up to him down. And when your friends are connected to your business, either as partners or investors, there can be nowhere safe to turn when times are hard.One entrepreneur who understands the pressures involved in running a startup is Dave McClure, an investor in Ecomom and the entrepreneur behind investment firm 500Startups.
"It was a hell of a lot of work for not a hell of a lot of return," he says. "And then there are days when you sit in a corner and cry. You can't really do anything else. You don't have a social life. You don't really want to interact with family and friends because there's just not much context for them. Your world revolves around your startup and it's all about trying to survive and not look like an idiot in front of employees."McClure realizes that the stress entrepreneurs go through is often self-inflicted. They could be working 9-to-5 jobs like most of their friends. And no matter how challenging startup pressures can be, they still deserve to be kept in perspective.
"There's still recognition that it's a set of first-world problems that don't get to the level of war, starvation, or something like that," he says. "But when your whole world is about trying to show everyone else you're successful and hold it together, and maintaining that psychic dissonance of externally everything is going great while the internal side you're freaking out and trying to make payroll ... it gets fucking stressful."Some of those who knew Sherman say their lives will never be the same. Some of his closest friends say his suicide has made them re-evaluate their careers and priorities. "Is a startup worth it?" one asks. "Is it worth life?"
* * * * *
On January 26, one day before his death, Jody Sherman was still making plans with friends. One trip he had planned was to Guatemala in early February. Another was with a friend to a tech conference.Neither of those trips would happen. The friend who was supposed to attend the conference with Sherman now clings to the memory of their last meeting. It came over dinner a month before Sherman's death, and the friend says that Sherman's face that night was haunting.
"He had this look on his face over dinner," the friend recalled. "I wouldn't say it was sad, but it was almost like goodbye. He said, 'I've never seen you look so relaxed. I respect you so much. He said, 'I can't believe how bad you are at raising money, but it's actually to your benefit.'"
A month later, Jody Sherman was gone.
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