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Entrepreneurs: The most important lesson I want you to take away from this, is to focus your energy on a market for which you have “enduring passion”. The kind that will keep pushing you when things get tough, as they inevitably will.

By Eric Ingram — Follow me @ericingram on Twitter

RedTagCrazy.com was my second startup effort, launched only 1 year after the first. My passion centered around product design, and to share that, I wanted to build a product customers could connect with emotionally. I’d developed eCommerce sites for a decade and felt strongly that I could connect to people by selling them things they wanted, with a superior shopping experience. I am all about the experience.

The idea for RedTagCrazy came after I discovered WhiskeyMilitia.com, an ODAT (One Deal At a Time) site for action sports products. I was intrigued, and became obsessed by watching the real-time sales numbers. I did some rough math and figured Whiskey was doing $20-30k per day in revenue. Most of all, I enjoyed watching things sell and getting excited to see the next item. I almost never purchased, but the excitement and mystery was enough to keep me coming back.

I never considered myself a big shopper, but thought, “If I get this addicted to a shopping site, there has to be something great here”. I was overwhelmed with the desire to build a shopping experience like this, and picked the largest relevant market I could think of.

Lesson #1: I built a business for which I had absolutely no passion, women’s fashion apparel.
I wasn’t sure if it mattered at the time. I was highly energized about building the product and user experience for this market, and naively dismissed the fact that I knew little about the customer.

One night I was inspired to design the site. I couldn’t think of a great product name, so I temporarily put the title “redtagcrazy” at the top of the mockup. The next morning I excitedly showed the mockup to my wife Melissa, who in her usual encouraging fashion said, “we have to build this”. I was hooked, and RedTagCrazy became my focus. I never came up with a name I liked better, and I was never satisfied with it. Nevertheless, “RedTagCrazy” stuck with us.

The following 3 months were all about market research. The biggest challenge was figuring out where to get these products at a low enough cost to re-sell at least 50% off retail prices. I knew the items had to be sought after, respected brands. Difficult to find at a discount. Those were the ingedients I saw work for WhiskeyMilitia. We scoured the internet and came up nearly empty handed. We decided to go to a Las Vegas trade show called ASD (Associated Surplus Dealers). Dissapointingly, we found mostly military surplus dealers, and no consistent source of goods. Frustrated, I asked a vendor where this kind of merchandise could be found, and was immediately referred to another trade show taking place the following week: The “Off Price Show”. Duh.

We came back to Vegas for the Off Price Show. Jackpot. In all of our prior searching, we never stumbled across the term “off price”. There, we found product sources necessary to make the RedTagCrazy vision a reality. Sought after products, respected brands, 50-80% off wholesale.

Melissa and I had a 10 minute budget discussion, and decided to spend $8,000 that day. I broke out the credit card. It was a gut-check moment. I knew from past experience that intelligent risk-taking was essential, and felt this risk would force us to follow through on our goals. We were clueless when it came to choosing products. The first day we spent understanding the brands available, researching online, and the next day went to purchase based on the research. It felt right.

At the time we had ~5 employees operating two divisions of our existing business: TrulyWeddingFavors.com and client development/consulting. It was going well — we were profitable. TrulyWeddingFavors.com was doing about $30-50k per month in revenue at a 35% profit margin. It was on auto-pilot (i.e. being neglected). The real difficulty was in taking time off our client development projects to build this new business. It was hard to justify. We lost one client due to a focused 2 week effort to build the RedTagCrazy site. That hurt, but oh well.

We spent 3 weeks in total building the RedTagCrazy platform, design & branding. It was launched on December 1st, 2008. I couldn’t sleep for days, watching the site, waiting for the flood of customers. It was more of a trickle. Still, we did over $9,000 in revenue that first month in large part thanks to a blogger named Kori Ellis who introduced the site to her fashion network network.

The slow trickle of early customers was difficult. We accumulated serious debt in purchasing that inventory, as revenue from our other businesses declined, and American Express demanded a single $15k payment at a bad time. In fear of losing our “good credit rating”, we discounted products early in an effort to raise capital, make customers happy, and pay some of our debts.

Lesson #2: I never made strong inventory plans, and never raised the capital necessary to operate an actual retail company. This began a seriosuly damaging trend of prematurely discounting inventory to solve capital deficiencies.

The next month we were blogged by Mashable, and January revenues increased to over $13,000. Still desperate for capital, I contacted a good friend/former colleague and asked him to invest. He was eager to help, and asked me to offer equity in exchange for a loan.

Lesson #3: I mixed up a loan with an investment. I exchanged equity for a loan to be fully repaid with interest, whether or not the equity could be liquidated. We were both inexperienced with this kind of financing and never fully connected on the vision of the company.

The following 3 months felt like being strapped to a rocket ship. Monthly revenues grew to over $90,000 by June, 6 months after launch. Inventory purchasing, hiring employees, managing cash flow. I enjoyed all of it, and dead last was a focus on the product itself: Fashion. The community grew in a way that I never anticipated. Thousands of customers spent an average 30 minutes on the site per day; a staggering figure for anyone other than Facebook, specifically an eCommerce site.

Although revenue was climbing, inventory cost related to revenue was climbing faster. Certain products/sizes were difficult to sell, and with capital being tight, we kept pushing prices down to move them out and bring new items in. We found ourselves caught in a bind — without liquidating this inventory, we lacked capital and purchasing new products would become impossible without raising more.

In August, we discovered a July net loss of ~$10,000 due to price and margin cuts. Forecasting a more dramatic loss in September, around $30k, our angel investor and mentor encouraged us to cut back, slow down and try to get cash flow under control. It sounded reasonable. We had ~15 employees at this time and I didn’t feel like I was in a position to argue. We needed more funding. Against my gut feeling, we agreed to make the cuts.

I was frustrated and fearful of what might happen next. I was blind with no dilusion that our losses would be sustainable in the following months. In an effort to avoid layoffs, I asked everyone (myself included) to cut pay by 25%. One person in particular resisted the cut, and my fear plus her opposition admittedly made her a target for layoff. It was the beginning in a series of incredibly difficult cuts.

The cuts ignited a customer revolt. Our community was very engaged by this time with ~6,000 comments per day, and well, they unavoidably got wind of the cuts and threw it back in our face. Terrible reviews started appearing all over the place. People were calling me out by name, making terrible accusations, making me out to be a monster. Their speculations were mostly off the mark, but any rebuttal just turned into more flaming. I pulled back and tried to minimize the personal interactions between customers and staff, but it didn’t help. I let my emotions get in the way of resolving the situation with them. Another big lesson learned.

The damage was done, and most critically, my dream of developing a great customer experience for this market was sapped. The following months were depressing, as revenue continued to decline. I realized the only way to fix this was to develop a great product/inventory strategy and raise a lot more capital. My vision was blurred. I just didn’t want to do it.

We spent many months just liquidating inventory, dropping prices until it was nearly gone. Trying to figure out what to do next. Looking for a new compelling vision. I became determined not to make these mistakes again — that my next startup would be focused on a market I had true passion for.

And here we are. RedTagCrazy inventory is almost completely gone.

This blog is highly revealing, and I hope others can learn from these mistakes as I have. It also serves as an official explanation to a community of thousands that once called RedTagCrazy “home”. We did things I will be forever proud of. Thanks to those who shared this experience with us in a positive way. To those I conflicted with, I apologize for not openning up sooner.

If you are interested in picking up RedTagCrazy where we left off, contact me.

Otherwise, this is good-bye to RedTagCrazy.