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When My Business Failed

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101 pointsharpalux36 comments

I'm friends with some people who have worked for Dan. Here's the best article I could find that might give some insight on what happened. Short answer is each year event per-participant expenses kept increasing (Pallotta has a bit of a "spendy" reputation), until it got out of control. At his last event only 14% of the money raised actually went to the charities:

http://www.commondreams.org/headlines.shtml?/headlines02/082...

Some more backstory: to his credit Dan Pallotta did create the AIDS rides and cancer walks. They seem common now, but at the time they were innovative and very successful in dramatically increasing the donations going to these charities. Then expenses started to climb. Dan likes everything to be very nice, luxurious even, for his participants. As the money rolled in, he spared no expense on having the best facilities, logistics, design, etc. for his events. At some point he screwed up his math, the expenses ate almost all the profits, and the AIDS and cancer charities went ballistic. And they got the press involved.

In addition, Pallotta Teamworks was set up as a for-profit company. This was not what caused the controversy, but it certainly added to it. Also not helping matters from a PR perspective is that Dan was known to pay himself a very large salary and live the high-end L.A. lifestyle. He also spent a very large sum (millions) on outfitting a warehouse into a unique, custom-designed office space that was something out of a bond movie. He wasn't doing anything malicious, but these things didn't help when the wave of bad press hit.

The sponsors found it easy to find people, including some of Dan's own employees, who were glad to duplicate the events. Except this time they only used non-profits, and guaranteed a minimum percentage of donations that would go to the actual charities.

Update: pictures of the above-mentioned Pallotta Teamworks office space (gallery at bottom of page):

http://www.pallottateamworks.com/about_apostrophe.php

At his last event only 14% of the money raised actually went to the charities...

Pallotta Teamworks was set up as a for-profit company

WOW...those are some good notes

10 years ago Palotta Teamwork was a pretty famous scam. I remember when the glitzy brochures started appearing at my office.

I recall when the SF/LA AIDS ride split from Pallotta Team Works. The major issue was about the overhead and actual percentage of dollars raised making it to the assorted charities.

Pallotta had gorgeous brochures, but you could tell all that glitz brought about overhead.

That said, the first year of the "independent" ride for the SF Aids Foundation/LA Gay and Lesbian Center overlapped with the (I believe) last Pallotta ride and had it's issues. It also took a number of years for the numbers to recover to where they were before dropping Pallotta.

Putting on multi-day events with a couple of thousand people participating takes a lot of effort. I think SFAF and LAGLC are better off now for putting on the ride themselves.

When I was working for Opsware, after it had just become a software business, pivoting from Loudcloud, 90%+ of our revenue came from a single, very, very large customer. (And, for the first 6-9 months, they were 100% of our revenue).

At every several all hands, I would ask our CEO, "What happens if they decide not to pay us?" - and his answer, at the time, was, "They will pay us" - basically we were betting the company on it - but at least we all knew that.

There is a reason why corporations are required to identify if a significant amount of their revenue from a single customer.

If you are getting all of your revenue from a single source, the question isn't what to do "if" that revenue disappears, it's what to do when that revenue disappears.

I was a bit disturbed that he seemed so surprised by this. It seems so obvious. I work in consulting and we have a very diverse set of clients, which theoretically provides some protection against the actions of any one client. Even then we put a lot of effort in to maintaining good relationships with our larger clients, as loosing one of them is the difference between a really good year and a really bad year.

Pallotta Teamworks is a bit of a special case. As a private, for-profit company who raised money for AIDS and cancer non-profit organizations, they had a business model that was quite controversial. While their rides and walks were popular with the participants, and they raised a lot of money, the entire non-profit sector was ambivalent about them. They loved the money but hated the commercial message, hated the profit angle, and was not happy with the percentage of revenue that made it through to actual research. I would bet this was a major factor in Avon taking control of their fundraising events.

Why exactly is profit / commerce considered a bad thing - especially here?

Is it an ideologic war waged by charities?

I could believe such feelings to be popular in Europe, but in the US - some deep ideological changes (of the business-unfriendly kind) must be happening :-(

> Why exactly is profit / commerce considered a bad thing - especially here?

Maybe because donating to a cause is not considered commerce?

Why exactly is profit / commerce considered a bad thing - especially here?

I think it's because a lot of the people who work in nonprofits and public agencies are at best ambivalent about profit and commerce, and at worse openly hostile to them, and such feelings are based primarily on emotions. So asking "Why?" in a way designed to elicit logical / intellectual reasons is unlikely to yield a lot of productive opinions (Jonathan Haidt discusses the role of non-logical emotions in cognition in his book The Righteous Mind, which is completely brilliant and ought to be read by everyone[1]).

Incidentally, my family's consulting firm provides grant writing services for nonprofits and public agencies (see http://blog.seliger.com if you're curious), and we face a lot of the profit / commerce ambivalence too. I even wrote about the issue in a post about the grant funding system and the role specialization and gains from trade play: http://blog.seliger.com/2012/03/25/why-fund-organizations-th... . A lot of people feel like nonprofits and public agencies are not supposed to be like other businesses, even though, in reality, they are a lot like other businesses except, obviously for the profit drive.

So, like other businesses, a lot of nonprofits buy goods and services they can't productively make or do themselves. We use the analogy of a plumber: most nonprofits do not have one on staff, and, when their toilets clog, they hire someone to do the job. That's fairly straightforward. But many do feel that grant applications are something like a college admissions essay, in which hiring a consultant is somehow cheating. [2] We obviously don't think so, but, nonetheless, a lot of people have that feeling and don't really think grant writing is like plumbing. But nonprofit and public agencies who submit better proposals tend to get funded more often than those who don't, so to some extent those feelings get weeded out by the "market," which still exists.

We've also argued before that there's no reason why a nonprofit grant writing agency can't exist, but in practice none do, and, if they did, the demand for their services would far outstrip supply, because grant writing is very boring, difficult, and tedious—a troika that makes for a great business, but doesn't give people the good feelings they might get from, say, doling out soup at a soup kitchen, or providing pro-bono legal work.[3]

Notes: [1] http://www.amazon.com/Righteous-Mind-Divided-Politics-Religi...

[2] Actually, hiring an admissions essay person starts to make sense when one thinks about how much might be on the line, but that's another issue.

[3] EDIT: Found the post that discusses these issues: http://blog.seliger.com/2008/08/08/tilting-at-windmills-why-... .

I would think that a nonprofit reasonably considers grant writing a core competence or at least well closer to a core competence than, say, plumbing.

Maybe. Many nonprofits are good at delivering human services, and less good at writing proposals, and the skills do not necessarily co-occur. Sufficiently large nonprofits will usually have a grant writer on staff, but smaller ones may not, and a really good grant writer will probably cost at least $70,000 per year in salary, and probably much more, which helps explain why relatively few small- to mid-sized organizations have one.

This is a specific instance of a more generalizable question about whether one should hire a consultant, learn a skill, hire an employee, or not have it performed, and we've written about that issue too: http://blog.seliger.com/2009/09/12/consultants-employees-and , which recurs in the business world.

I haven't found this mythical EU/US difference in overall attitudes, either in history or the present, except on specific issues. Europeans generally have higher taxes and better social-welfare systems, but not particularly different attitudes besides that. Both pro-business market-oriented views and skeptical-of-business populist views have long been common in both places. Heck, many American founding fathers fought in the French Revolution, and some (like Thomas Paine) wrote some of the more famous "left-wing" documents left by that revolution. And Denmark has some of today's more successful multinational businesses (Maersk, Lego, Carlsberg), which are quite popular domestically. Yet somehow Europeans generally assume that Americans are all Randians, and Americans assume that Europeans are all Marxists.

It's a matter of degree, with plenty of "outliers" on both sides, of course, but it is there.

A similar feeling happens when hospitals put their cafés out to tender and the WRVS[1] who had been running the café lose the bid, and a commercial firm wins.

(http://news.bbc.co.uk/1/hi/england/cornwall/6200817.stm)

This article is baffling - it was written in 2012 but talks about financial pressure in the NHS - and the need to run health care like a business - as something new. (http://www.thisisstaffordshire.co.uk/bow-WRVS-girls/story-16...)

And even the WRVS is not immune to this. (http://www.bbc.co.uk/news/uk-wales-north-west-wales-14540603)

[1] WRVS - Woman's Royal Volunteer Service.

There's a pretty obvious conflict between nonprofit fundraising and profit-making. It's quite difficult to make the case that profit-making would be beneficial in the long run, even if true.

I'm not sure that's true. Most charities spend large amounts of money to put these events on. They pay for advertising, for software development, for consumables, for staff.

None of these things come for free, and the people providing them are doing so to make money.

Perhaps because if it's profit, then it's not going to the cause you're supposedly trying to help.

Because people don't like the idea of other people pocketing their donations.

It can be hard to mix for-profit and non-profit activities.

If everyone on a joint project is in a for-profit mode, competing within the limits of reputation, ethics, and the law to advance their own interests, then people generally figure the dynamic tension balances out. Everyone gets what they need or deserve, or the participants will move along. And, if someone manages to make out with a bit more, well, good for them, everyone was trying for the same.

If the joint project has non-profit characteristics, or some participants are maximizing a cause rather than their own financial interests, then every bit of profit can become suspect. How much is the right amount? Couldn't that be ceded to the cause? At some level there's a 1-for-1 tradeoff of profits-vs-monies-raised. People understand and tolerate that sort of zero-sum division-of-surplus competition in the for-profit realm, but that same dynamic can be toxic to the motivations of those donating effort for a cause/community. ("I donated my time and money so that company X could have a another record quarter?!?")

Those considering a for-profit startup to service non-profit causes/entities should keep this in mind: there may be a rather low cap on how profitable you can become before partners start to suspect your motives and margins.

The problem can be somewhat avoided if there's a large competitive market for the services with understood prevailing rates. In such a case, each side can take a more arm's-length/take-it-or-leave-it attitude towards the other, trusting the market prices as roughly 'fair'. (The non-profit doesn't mind paying a provider with competitive rates; the for-profit provider could easily serve other for-profit or non-profit buyers with the same capacity.) This didn't seem to be the case for Palotta Teamworks' fundraising projects: each party seemed completely dependent on the other, making the entire profit-margin-vs-program-revenue pie-splitting open to review and mutual suspicion.

This seemed like an interesting story so I dug into it a bit more because the notion of a for-profit charity organization was unfamiliar to me.

But detailed information seems very scarce. The article states Avon were sued for breach of contract - but mentions no damages, despite an apparently successful claim. This seems very strange - clearly the founder was passionate about his cause, so why not take whatever penalties were paid out and use them to restart the cause?

From reading the Pallotta Teamworks (PTW) site (http://www.pallottateamworks.com/about_pallotta4.php), one can infer there was apparently an arbitration (IANAL, how do you go from "suing" to "arbitration"? I thought suing can only happen after arbitration but there's no mention of a lawsuit...) but even on that site there is absolutely zero indication of PTW receiving anything despite "winning". This story just doesn't add up.

KomenWatch, which seems rather biased, but still adds another angle to the story, suggest that Avon severed ties with PTW because of growing criticism (http://komenwatch.org/history-politics/avon-3-day/).

Anybody have a reference to a more objective discussion of these events?

http://www.sfgate.com/health/article/AIDS-Ride-firm-closes-i... hints a bit more controversy than apparent in the OP.

http://google.brand.edgar-online.com/EFX_dll/EDGARpro.dll?Fe...

"Avon Products Foundation, Inc. (the “Foundation”) has been a defendant in an arbitration proceeding brought by Pallotta TeamWorks (“Pallotta”) in September 2002, before Judicial Arbitration and Mediation Services, Inc. Pallotta asserted claims arising out of the Foundation’s decision to use another party to conduct breast cancer fundraising events. In July 2005 the arbitrator issued a Partial Final Award in this matter, awarding Pallotta $3.0 [million ] in net damages, after an offset for Foundation counterclaims. The arbitrator also instructed the parties to reach agreement on three outstanding issues: (i) pre-award interest; (ii) costs and attorney’s fees; and (iii) possible liabilities under Pallotta lease agreements. In October 2005 the Foundation entered into a settlement with Pallotta and paid Pallotta $7.5 [million] in exchange for a release of Pallotta’s claims. The Foundation is a registered 501(c)(3) charity and is a distinct entity from Avon Products, Inc., which has not been a party to these proceedings. The Company has not determined whether to make a contribution to the Foundation to cover all or part of the settlement.

I thought suing can only happen after arbitration but there's no mention of a lawsuit...) but even on that site there is absolutely zero indication of PTW receiving anything despite "winning". This story just doesn't add up.

Arbitration is an alternative dispute resolution mechanism for lawsuits - it replaces a court trial. Its particularly used frequently in contract disputes. (Sometimes taking a case to arbitration as opposed to court is dictated in the initial contract).

Arbitration can occur at any time during a dispute/lawsuit, sometimes ordered by a judge, or agreed to by the parties in their own settlement negotiations.

The title is incredibly misleading. The article is about a private fundraising company that does 3-day events, which folded when its customer withdrew. It's not a company doing other things that tried its hand at philanthropy and died in short order.

"Dan Pallotta is an expert in nonprofit sector innovation and a pioneering social entrepreneur. He is the founder of Pallotta TeamWorks, which invented the multiday AIDSRides and Breast Cancer 3-Days"

What exactly is inventive in Breast Cancer 3 Days? The fact that you can walk for 3 days and raise money at the same time? I guess I'm missing some important detail here (honest, I'm not trolling, I genuinely can't see anything too inventive).

Sometimes, people use the word "invented" when they actually meant "created". I suspect that's true in this case.

English is an immensely flexible language, for better or worse. :)

Ok, sorry, I'm not a native speaker and such nuances might very easily escape me.

An awful thing to happen, but an important lesson to any entrepreneur:

Never rely on just one client for the bulk of your work. You're a slave to your client. This also holds for 1-man bands (such as myself) who does consulting or contracting: if your client leaves, then you have no income and must find a new one or, if it is at all possible, several new ones to spread the risk.

I still don't understand how a 400-person company folded in 3 days. Like the leadership team was not willing to put up a fight.

I once worked for a .COM company who similarly just closed the doors one day - no warning to employees in advance. Where did the operating capital go? They had paying customers - how could they not put up more of a fight?

In the OP, ex-employees started their own event businesses with a similar model. Same with my .COM - ex-employees started companies and signed the clients of the failed company.

Makes no sense.

Assuming that leaders of companies always have the best interest of the company in mind is dangerous. The type of personality that tends to succeed in the business world is probably also the type of person that is willing to shut down a company if it makes financial sense to do so, despite large job losses.

You're right - in that the only people who really got screwed when my .COM employer shut down was employees and investors, while founders and executives had already enriched themselves from the various financing rounds. So their willingness to fight was tempered by their desire for a long Caribbean vacation.

When the s* hits the fan at Groupon, will the founders want to fight, or will they look at the $1B they have in their bank account and decide to go to Italy for a while.

Seems like a fairly straightforward case of having all your eggs in one basket.

FTA - "I've learned that the adage about innovation is true — that at first, people say your idea is absurd, then they say it was obvious all along, and then they say it was their idea to begin with."

Sad story, I hate hearing about businesses going belly-up. But when I read "the 3-Days were 75% of our business" it gave me pause...

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