Web Hosting Talk : Web Hosting Main Forums : Running a Web Hosting Business : Worst WebHost Failure - An owner finally talking

[aplawson]

I had a company a while back while that started good then went very very bad and ultimately ended in a dismal crashing failure. I'm curious if anyone else is willing to share their story (or stories) of a hosting venture that was an over-the-top failure? Here's mine:


I'm married with 2 kids (one special needs) and I found myself out of work after being laid off from a great company in Los Angeles post-9/11. So we moved the family to northern California but I couldn't find work for over a year due to the dot com burst and hiring freeze following the terrorist attacks. So in a desperate move, I started CalHost since I understood hosting and considered myself as a pretty good system admin. And I was. Well, I figured it couldn't hurt to resell some IRC servers and see how it went. Things actually went fairly very well at first because I was reselling several servers from Staminus. I reached an all-time high of about 70-80 dedicated server rentals and started considering about owning my own machines and eliminating the middleman if you will. Thinking it would be an easy conversion (going from renting to purchasing and running my own business with an existing client base), I signed an equipment lease with the help of my father co-signing the contract and then I signed a colo contract at RagingWire. 50 servers arrived (in parts). After assembling most of them, I racked them in my cage at RagingWire and was off.

The first thing that went wrong was that I failed to understand the churn that occurs when you switch from one DC to another. Most IRC customers are sorely affected by changing an IP structure, so many of my clients cancelled - about 20 of them did.That left me with about 30 but I thought that was okay - I'll be able to replace them. A month later, I realized that among those who stayed, 50-60% were fraudulant customers. They were all IRC-customers based in the Middle East and were using stolen credit cards. I charged them my first month and received a massive chargeback summary to the tune of $11,000. In a panic, I called my father who, with the help of my mother-in-law and my natural mother, covered the expense.

My next mistake was to somehow get these customers to use real credit cards because if I cancelled them, I would have all remaining income and still have about $4000 in monthly bills. So I charged them to cover the chargebacks then again to cover next month's bills. It was a move of desperation and it's strange what people do when they're in a panic. Anyway, I found myself up to about 10,000 in debt again and lost my merchant account. I also hadn't been able to pay RagingWire because the money would come then get reversed. So I was 3 months into a 30 month contract with no money to pay the bills. So now I had another $13,000 to pay in chargebacks (that came out of my life savings) and another $8,000 due to pay RagingWire. Given my inexperience, I thought I could just grab my equipment and move to another NOC. They guard stopped me and said my equipment was off limits and that sent me into another panic. Not access my own damn servers? Are you kidding me? It was a foreign concept but a lesson that came hard and fast. Fortunately, RagingWire forgave the remaining months in the contract (probably seeing the stupidity of their client) so long as I was able to pay them the $8000 hosting bill. Another round of charges and help from my mother satisfied that and I was able to move to another NOC.

After moving to the new NOC, I lost all but 2 server customers. Given $2700 in monthly lease payments and $1800 in hosting bills, I was seeing the pattern emerge again which scared me. My father helped me another two times with large payment because I simply couldn't pay the bills. The third time I called, my mother-in-law told me my Dad was getting panic attacks every time I called because the leasing company was threatening him saying they planned to get their money one way or another. So I vowed I would never call again. But wehat do you do when you can't back out of a lease agreement an your father is being threatened with garnishments, lawsuits and so forth? I felt an all-comnsuming guilt for doing this to my family.

Then I started dealing with other hosting companies on this board posting rumors about things they didn't know about and contacted my customers directly in hopes of stealing them from me. That wasn't so bad all things considered but it pissed me off a little.

Anyway, I didn't mention my own family. We lost our entire life savings, lost our 401K, our relationship was strained beyond all comprehension, almost all of our income was being poured into the unaffordable lease payments which created stress at home beyond any I'd ever known.

So I felt I failed my immediate family, my father was having panic attacks and my relationships were in shambles.

One day, I received $8500 in chargebacks from 4 months prior and I didn't have the money to pay it. I called my uncle who is my god father and he couldn't believe what I had done. So that door was shut. I couldn't go to my father again and my wife was on the brink herself. At that point I blamed myself for my failures so profusely and profoundly that I could not think of living any longer. I failed everyone in my life and I felt there was no way out.

So one day, I received a call that was mildly upsetting but it was the staw that broke my back. I walked out and attempted suicide (two occasions) and was committed to a mental hospital. While I was admitted, my family got together and must have mortgaged something (or many thigns) because the $80,000 lease debt was paid, my hosting bills were paid and CalHost was shut down while I learned the value of life itself inside a cell with nothing but a book and a nurse checking me every 15 minutes to ensure I didn't hang myself.

Fast-forward:
Today, my family is much better, all is well with my father and his family and I have no further financial obligations related to the business. Much if not all of that result is due to my brothers and sisters who sought to relieve me from the strain of my debt rather than to let me endure the consequences of my failure. Sometimes I wish they didn't do that because I thought I deserved it, but they loved me too much and couldn't bear to see it happen.

That's my story and I shared it because it's time I got it off my chest. But I want to share with you that if you are under pressure in a similar way, please PM me. I may have some insight and experiences I could pass on. We can't change what's done or reverse past mistakes, but I may hopefully be able to provide you an ear that understands as one that made it out alive. I didn't want to live at the time, but that's the difference a loving family can make.

Anyone else have a story they'd like to share?

[vivithemage]

Just reading over part of it...why didn't you just keep renting out those servers, and start to expand into owning your own? Sure it may be confusing, but you would not have run into the issue of losing 20 or so customers right away.

Just finished...did you do this all alone? No way would I have considered managing 80 servers on my lonesome.

Very interesting store though, thank you for sharing.

[CodyRo]

Very sad but insightful - thank you for sharing. I tweeted it - hope you don't mind

[aplawson]

Originally Posted by vivithemage

Just reading over part of it...why didn't you just keep renting out those servers, and start to expand into owning your own? Sure it may be confusing, but you would not have run into the issue of losing 20 or so customers right away.

Just finished...did you do this all alone? No way would I have considered managing 80 servers on my lonesome.

Very interesting store though, thank you for sharing.

I was doing it alone. I had some help but it was sporadic.

[AstroNyu]

Interesting read although this is one of the example of getting into business without proper business plan.

Glad you sorted it now.

[WII-Aaron]

There are thousands of stories like yours out there. People don't seem to realize that this business is serious and not something to get into just because you think you're a "pretty good system admin."

You need to be financially secure and emotionally stable and to fully understand and appreciate the risks involved.

I'm glad to hear that in the end everything turned out ok. (You know what they say about any landing you can walk away from... it's a good landing. ) You still have your family and it sounds like your emotional health is better.

Hopefully you look at this as a learning experience. I'm in the fortunate position of steering a successful company now but there were other companies past that were less successful.

[aplawson]

A couple things that particularly caught me off guard:

1. I was in my thirties but I didn't understand who I was. Only hospitalization revealed I was bi-polar and slightly autistic. Knowing these things now helps me understand what I need to do to avoid similar situations in the future. I plan to start a company again (not hosting), but my earlier lessons will help me keep the right perspective.

2. I didn't understand the impact of doing things without a plan. I didn't have a plan because I thought I was smart enough to be successful without one. But as a result of that line of extremely faulty thinking, everything I did ended up being a reaction to a negative result as opposed to working proactively to achieve a particular positive result.

3. I never believed in the power of details. I signed contracts in haste and didn't always believe that the fine print would hold such value. It seems like such common sense now that it's somewhat embarrassing to admit after the fact.

So much of me wishes I could turn back the clock. Not just re the business but on many things.

[IGXHost]

In my honest opinion, your business would've been great if your customers were not fraudulent. I guess back then credit card fraud was not as easily preventable. There are certain measures in place now that can help prevent credit card fraud as severe as you have experienced.

[ZKuJoe]

I was investing all of my time and money into my paid hosting business that I started in 2007. Well as of January 1st 2009, I had sold all of the clients I had and shut my doors because of various reasons, one being my wife and how much time I was devoting to my company instead of work, school, or family.

I had outsourced my tech support which saved me a lot of time but I was still to focused on providing the best service I could for my customers. When something would happen to the server or a website I would get tunnel vision to the point that I would sleep on the couch as to not wake up my wife at night.

Even with the outsourced support I felt a personal responsibility towards my customers and continued to grab help desk tickets even though I was paying a set monthly fee regardless how many tickets the company answered. So as to save my marriage and focus on more important things, I sold the company.

It was a passion that I desperately loved and by far the most rewarding thing I have ever done. I wasn't in the business to make money, I was in it to provide a service and help people. Well shortly after closing my doors I returned to FreeWebHostingTalk and picked up a small VPS to offer free hosting as a side project. I figured it would give me the enjoyment I received from helping people and even more so because my reasons were purely unselfish (I don't place ads anywhere except for the support forum). I was glad that I didn't feel that "tied down" feeling I got with paid customers because this service was free and I am under no obligation to have 24x7 support or even a guaranteed uptime... that's not to say I don't aim for it, but there is no added pressure if the server is down for 10 minutes or if a ticket sits for 4 hours.

So I feel that the switch between paid hosting and free hosting is probably what saved me. Not to mention I've found a few great people that have volunteered to help me out so that's takes even more of the weight off of my shoulders. I still have that die hard devotion to my clients, but when people are getting something free they don't expect the world from you nor are they as vicious if they do not get exactly what they want.

The only problem with the change from offering paid hosting as a business and free hosting as a service, is the problem of income (well, lack there of). I've had to upgrade my server multiple times and just recently took the jump to a dedicated server, but luckily the enjoyment I receive from this project is much more important to me than any costs involved.

[hostxchng]

@aplawson it is regrettable that both you and your family were made to endure so much. however, your courage to admit your mistakes and learn from them is very encouraging ... a powerful experience; one i thank you for sharing that with us.

@ZKuJoe it is great that you are still able to do what you enjoy with the added benefit of a new found balance between your professional and private affairs.

both of you are fortunate to have such awesome enduring wives. the best to both you. i have come to realize in my short time within the industry that the hosting business is cutthroat and can consume a man's soul in any number of ways should he allow it. thanks to webhostingtalk and the abundance of experience of its members i have learned and continue to do so, so that i may avoid the perilous pitfalls that lie in wait as both a businessman and customer.

[network82]

Interesting Story and a reminder to anyone running a business what happens when you do not put your thinking head on and actually plan everything in detail.

Never mind the business side of it, but by your claims your a good sysAdmin and so planning in detail should come second nature, and it was poor planning that basically ended your business.

Its more sad you put your family through allot of stress rather then take the responsibility to sort it out yourself, but i am glad you've got past that difficult time, and the family is happy again.

[Katatonic]

Thanks for sharing your experience and I can see it goes down to a very personal level. It's always good to have a business plan and prepare for the worst case scenario, as usually particularly with money and dept it always snow balls, eventually catching up. I'm not implying that you did any thing wrong - I'm just saying it's good to be reminded of good practice every now and then which this post has done. Good luck with any future plans.

[aplawson]

Originally Posted by network82

Interesting Story and a reminder to anyone running a business what happens when you do not put your thinking head on and actually plan everything in detail.

Never mind the business side of it, but by your claims your a good sysAdmin and so planning in detail should come second nature, and it was poor planning that basically ended your business.

Its more sad you put your family through allot of stress rather then take the responsibility to sort it out yourself, but i am glad you've got past that difficult time, and the family is happy again.

Being a good engineer versus being a good businessman are two very different things. Being good at one thing does not translate into being good at something else, correct? But you and others hit the nail on the head; mine is story of poor planning gone extremely awry. And it hopefully provides a glimpse to what panic can do to the psyche and reason in general. Many lessons came from that period and I'm thrilled things did not turn out as they could have (or as some would think, should have).

[leeware]

There are several aspects of your story that I find fascinating, and I am glad that you've learned from your mistakes. While your ambitions were correct, your execution was a complete failure for many reasons some of which you talked about. However, sharing your experience is valuable for so many and I personally thank you for doing so as it provides an opportunity to save others from the same fate. Here are some of the lessons I think one can draw from your story and I hope that you learned all of them.

"...Thinking it would be an easy conversion (going from renting to purchasing and running my own business with an existing client base)..."

#1. You failed to understand the costs and the risks associated with doing things yourself versus simply reselling someone elses services. Reselling is right for some people but not others. It is right for those who don't have the capital, interest or expertise to invest in the underlying infrastructure to deliver an IT service but have the skills to manage, maintain and up sell (add value) to an existing service.

Reselling is not a good deal for someone who wants to maintain some control over their long-term-costs but has the capital in place start and maintain a service long enough for it to reach a point where there can be a return on investment. In other words, I am suggesting that there should be some long-term business reason for removing the middle-man and one should carefully weigh the risks of such an execution because it might not save you any money in the short term, but can save you thousands while giving you an enormous amount of flexibility in the long run. It's like OPTION-A loans and credit cards while any one can use them they are not products for everyone.


#2. You didn't mention how long it took you to get those clients or how long they were with you. Therefore, I can only assume that it wasn't long enough for you to experience the kinds of problems that would have given pause to your ambition plans. In other words, had you continued doing your thing for another 30-60 days while you were researching your options and the consequences associated with your choices, that 50-60% of your customers that turned out to be bad would have happened anyway but with a lot less risk to you. Furthermore, I feel that had this happened, it would have caused you to rethink your plans.

#3. "I signed an equipment lease with the help of my father co-signing the contract"

While I always think it's great that people are able to rely on their family and friends to contribute materially to the development of a business, it is generally a very bad idea for several reasons which I am sure are clear to you now. Furthermore, the fact that you needed finanacial assistance was further proof that you were ill prepared to assume the risks associated with your choosen path. I don't know how much lobbying you had to perform to get your father to put his credit and money at risk but it is also clear, that he didn't fully understand the risks associated with his commitment to be responsible for your debt if your plans bottomed out.

Finally, if you are going to sign contracts for goods and services it is helpful to have financial reserves in place to cover the cost of said contracts so that if things go south you can remain solvent and protect your credit. Maintaining reserves signifies a level of responsibility that says as an investor that you believe so much in your ideas that you are willing to assume 100% of the risks for your business and not shift that burden to your creditors, other investors etc. Furthermore, when your vendors and creditors understand your financial position (meaning that they know they will get paid no matter what.) It is much easier to win concessions and gain extremely favorable terms.

#4. There is an aspect of your story that ties into the global economic meltdown that is currently being experienced. Once we cut through the noise and political theater surrounding the various causes of the banking and housing crisis. We are left with the fact that most people broke an important and fundamental rule: Hope for the best but plan for the worse. Your story along with millions of others is an example of people who did the exact opposite which is hoping for the best and planning for the best. Which means that a lot of important decisions were made based on irrational assumptions about things that are not under a persons immediate control like; employment, housing values, marriages, health, market conditions etc. In other words, there was an absurdly irrational projection that things would remain the same or get better and no plans in place to deal with the 50% probability that they would not remain the same or get worse.

The moral of the story is "Hope for the best but plan for the worse."

[rustelekom]

Sad story but to be honest i only see two big problem which was get you out from business:

1) Why just not inform customer about your plan before making switch from rental to own equipment? At least you was need check connectivity to your new location for your existing customers. Or at least you can offer to clients choice - stay on old (rental) servers or move to new servers. Actually i see many such mistake - host usually wouldn't like communicate with his customer about any own plans. If you had plan set up new line of dedicated servers, new DC in some town or anything else why just not contact to your clients (may be not to all but to selected) and consult with them BEFORE doing anything?
2) Massive chargebacks can happen with anyone and anywhere - unfortunately you have not enough control for prevent it but you always need use multiple level of verification (by calling to customer and recording his response for example - don't know are it is allowed in US but for Russia it is allowed) . 50-60% fraudulent clients look for me very high percentage if you ask me.
3) I doubt that if you have had a business plan you will be safe from problem what happen with you. It is not business plan problem from my view of point - it is two mistake which you make yourself (mostly) and one of them is common (remember sad story's with shared host owners who move their servers from one location to another and lost 30-40% of their clients).