Conclusion

Zennovation in Retrospect

When I began writing my father’s book, I had some knowledge of the financial operations of a handful of public companies. I had been reading many books, research reports, shareholder and partner letters, and Securities and Exchange Commission (SEC) filings to expand my knowledge base on how to invest and in what to invest. That research has proved quite meaningful to managing my own portfolio of public equities as well as offering some insight into my emotional reactions to financial gains and losses. However, none of that work prepared me to be an entrepreneur the way the experience of writing this book has. My father has been a tutor of sorts in helping me learn about day-to-day business operations.

I treated writing the book much like an academic pursuit. Researching my father’s life through one-on-one interviews offered me his approach to entrepreneurship, but I was also lucky enough to talk with other academics, business leaders, and psychologists. In tandem, these conversations opened my eyes to the art of entrepreneurship—I found the challenges and the thought processes behind company creation, branding, and marketing absolutely fascinating.

As early as high school, I enjoyed drawing, painting, and screen printing. My interests later expanded to include photography and video art. As a young student, I was fortunate enough to be in a handful of exhibitions, ranging from a small mom-and-pop ice cream store to an exhibition for young emerging talent at the Norman Rockwell Museum. My artistic activities, however, I treated as nothing more than a hobby. I attended Vassar College and studied philosophy, religion, political science, and Italian literature. I never stepped into a studio art class nor did I think to pursue art or art history.

I moved back home to New York and found an apartment. I matriculated into New York University, where I earned a master’s degree from the Graduate School of Arts and Science. This period was one of intensive study, but occasionally I found myself going to more art openings and exhibitions. I became friendly with an art dealer who represented only New York–based emerging artists. He was going to store some artwork but asked if I’d like to borrow something for my apartment since I had just moved into a new place. I agreed and for about a year, I had a fantastic work by the mid-career artist Johnathan Cramer hanging in my living room. After, I had to return the piece and had a blank wall to fill, so I decided to make a mixed media piece integrating my love for painting with photography.

The dealer came to my house to see the new work. He fell in love with it and asked if I could make more. From that point on, he began representing my work. However, his operation was very small and it was clear he needed help. I had been inadvertently developing a diverse set of skills, ranging from my interest in computer science to design and photography. After a few exhibitions, I partnered with my dealer. We worked together for some time but then had a bit of a falling out; however, I had learned a lot about the business, everything from exhibition production and lighting to art handling. I didn’t want to give up the business quite yet but I needed to move on from that partnership.

It was the middle of 2008. The recession had begun to take hold, causing various economic challenges regarding any- and everything involved in starting a gallery. I decided to jump in head first, figuring that given the financial climate I’d be at an advantage as one of the few people negotiating new contracts with advertisers, architects, contractors, print shops, public relations specialists, and so on. This was the first time I had made a major commitment of capital, and it may have been the worst economic downturn I will witness. While this instinct grew out of my enjoyment in public equity investment, various readings on finance, and an understanding gleaned from attending financial conferences, the structure and basis for what would become my new gallery stemmed from the entrepreneurial spirit my father and his colleagues instilled in me while writing this book. This chapter is not about my father, but it is about the application of his ideas—what he learned from some of his failures, and everything in between that he has taught me about how to found a start-up. The gallery is still new and fresh with its own growing pains, but in this chapter, I hope to illustrate that the concepts put forth in this book have applications beyond the fashion and textile industries.

Although my business is very different from Takihyo’s, there are certain fundamental principles that translate across the industries. In Chapter 18, my father discusses the problems inherent not only in 50/50 equity splits but also in the downsides of creating a lucrative venture. My father learned the hard way that verbal contracts hold no legitimacy in the American legal system. However, beginning a venture where employees feel part of the organization from top to bottom introduces new challenges. In my father’s case, at first Donna Karan was to have control only over the design room, but later on in the partnership her husband was given an executive role. There are three different risks here.

The first risk had been that all financial support came from the management team, but management could lose control in a standstill among partners. Donna was given 50 percent sweat equity on paper and in a verbal agreement the right to control only the design room. The written agreement left Donna with not only the equity power to make decisions but also the capacity to overrule the other partners. In many cases, a creative type should not also have the duties of a managerial or fiduciary executive because this combination of skill sets is akin to mixing oil and water—nothing gets done and there are poor decisions on both sides of the equation. In the world of fashion, there are very few people who are capable of both managing and designing.

And the second risk came from this loss of power among management. There was the insertion of an executive, undermining managerial control. Because of Donna’s equity position, she had the right to place whomever she chose as a company officer—she did so with her husband, who had little experience in the field. Donna’s voice in the boardroom then doubled. Although at first she was to have control only of the design room, she now had greater influence. As noted in previous chapters, this change of events posed new problems not only to my father but also to the communication among executives and the design team, which led to the failed initial public offering and subsequent sale to Louis Vuitton Moet Hennessey (LVMH).

Lastly, Donna’s name was the company. There was nothing wrong with naming the Donna Karan Company after its primary designer, but neither my father nor Frank foresaw that Donna would sell the rights to her own name. This only emerged later as a problem with the initial public offering. When LVMH showed interest in purchasing the company, the group had to buy not only the operating company but also a holding company whose primary asset was the rights to use “Donna Karan.” Sequestering her name in a separate company, as my father had recommended, tripled Donna’s take upon the LVMH acquisition, but also denied the liquidation event to the financiers and executive management.

These three points, I have discussed ad absurdum with my father. He talks about his faults in managing the Donna Karan Company as those in which he prepared only for downside risk rather than upside risk. Because Donna Karan did so well, my father never thought his upside take would have been decimated and divided by his partners. In my newest venture, I have (hopefully) rightfully applied the outcome of these discussions to address these three points in the following ways so as to protect myself on both the downside and the upside.

More particularly, when starting my gallery, I was interested in finding someone with whom I could work well. I needed a complement to my style and a supplement to my ken. I needed someone who not only had experience within the art world, but I also searched for legacy, good taste, and a willingness to grow with the company rather than on the side of the company. Experience speaks for itself, but legacy provides downside risk that many other ventures do not. I wanted an employee who was young enough to want to grow and to work with me to create an image, a brand, and, more important, a community—a lifestyle. Legacy followed by a piqued interest in the field can determine one’s sustainability within the field. Whomever I would hire would have a strong understanding of how the art world works—unable to be disenchanted and so engaged that no other line of work would satisfy him or her.

I also needed additional access to the art world. The leverage that an employee with all of these traits could offer would enhance the recognition and reputation of the new gallery and supply press exposure and an existing client base to boot. How could I do all of this while not breaking the bank and how could I find someone to meet exactly my expectations and hopes? Word-of-mouth seemed to be the only way to find the right person, but when I found her I knew the deal would need to be sweet enough to keep her interest.

Luckily, I found Rebecca Heidenberg. After asking countless people if they knew anyone who would meet my criteria, I finally asked the right person. I suppose this is all it takes. Before we began working together, I interviewed many people for the position of director of the new gallery. Some were either hot or cold; some seemed too self-serving and self-interested to want to become part of a larger process. Some were in the art world as the children of known, established artists, and others were hungry for a job. We were, in fact, at the nadir of the recession (provided the Euro-crisis does not implode and plunge the US economy into another, perhaps deeper, recessionary period). For the art world, everything seemed to be falling apart, but some still seemed picky and others were desperate.

Returning to Rebecca, she met the initial criteria. She had been in the business about 10 years, and her mother has been an art dealer for decades. Rebecca worked for a number of galleries, but her skills as a curator and her ability to source difficult-to-find works come from a life spent in the art world meeting collectors, curators, dealers, developers, and others. Growing up with a successful art dealer as a parent has empowered her not to replicate but to create her own path with the strength of a life’s worth of contacts and a strong reputation behind her. Finding and convincing her to work for me capped the first of the three risks outlined earlier.

I capped the first risk by not partnering with her at all; however, our agreement states I am to relinquish a 10 percent stake to her when the company becomes cash-flow positive and net debts have been paid. The 10 percent places Rebecca in a minority shareholder position, which is not quite the same as the 15 percent or higher stake a court would rule in favor of if we were to become wildly successful. I not only finance all operations in the gallery but also provide support on every level of operations—giving away 10 percent is generous, but enough to comfort Rebecca.

Keeping Rebecca at a 10 percent equity position then limits her right to place other associates. I also have a strict policy to not hire those with whom any of us has a personal or familial relationship. There is some gray area among certain artists with which the gallery lightly flirts, but artists are not management nor are they a part of the curatorial branding. Moreover, we would never curate a show with an artist we do not believe shows talent and works well within the framework of how the gallery is branded and marketed. As a result, there is a limited loss of control. However, this does not mean I have painted Rebecca in a corner and given her no room to grow. Rebecca’s career is meant to mature alongside the gallery’s growth. I want someone to grow with me in this gallery project.

I have named the gallery “RH Gallery”—using Rebecca’s initials and thereby underlining her role as the face of the gallery. Naming the gallery after her also further leverages her potential for growth alongside my endeavors in the art world. Having her name on the gallery gives Rebecca greater incentive to make the project work. Although some may criticize me for not risking opening a gallery using my own name, I have found a means by which to leverage her contacts, her relationship with her mother, and her trust. The latter, perhaps, being the most complicated. The act of letting someone handle the curatorial element of the business as well as letting her receive the lion’s share of the credit places the “high” of our potential successes in her hands but still leaves me holding the risk of loss.

Provided this idea is mutually understood, we act to hedge one another not only as potential business partners but also as complementary skill sets in the gallery environment and art industry as a whole. In a way, offering Rebecca a chance without the need to put up her own capital to do what she loves limits my risk as well as her own. The only other potential problem that could arise is if Rebecca chooses to do business outside of the gallery—taking revenues away from the gallery to put money in pocket. Although this risk is legitimate and difficult to police, it is also outlined in our agreement that she is not to make any sales of art outside of our gallery. In short, she can do what she has been destined to do, and I can help her reach that place. The second and third risks, discussed previously, are addressed in her treatment as an associate of the company.

Because I am the only one injecting capital, if I chose to stop, so too would all operations. There might be some outstanding bills that I would have to address, but the exposure to loss would be limited to what has been spent within the gallery as well as the cost of returning inventory and finding a tenant for the space. Although the Donna Karan Company was a far more complex operation on a day-to-day basis and much larger in structure, there are many comparisons to be made with operating a gallery; because I oversee every dollar earned and spent at the gallery, there is no room for the mismanagement of funds or the addition of unwanted voices. Also, I do not allow others to dictate the hiring process. I am very interested in hearing what others have to say about prospective employees, but I am more willing to take responsibility for a hire that fails if I was the one who made the final decision to hire the person. As noted in Chapter 17 with the lawsuit regarding Michael Lichtenstein’s firing, major hiring decisions should be left to management rather than associates. Associates tend to have less skin in the game and even if they don’t always get along with one another, if a better product or service results, everyone will learn to get along or get replaced.

Within the first months of opening the gallery, I had somewhat high employee turnover. This was due to two primary factors. First, although I was paying competitively with the art industry, I was not paying competitively as a whole. In many cases, this doesn’t seem to matter as high salary is not an expectation of the employee for a cultural establishment—at least not a new gallery. Second, some hires were somewhat rushed and I never got a chance to vet them out with the other associates. Combined, these two elements led to a couple of poor judgments. Now, before anyone is hired, everyone meets with the prospective employee to make sure there is good chemistry among the group. If cooperation doesn’t exist, at least at a professional level, nothing gets done.

The third major risk I have addressed in my new venture, as mentioned earlier, is related to what I learned from the loss my father suffered by allowing Donna Karan to place ownership of her name in a separate entity. I hold all the rights to RH Gallery within a separate entity so in case of a sale or dissolution, I can reuse the brand if need be in the future. In most possible scenarios, a rebirth of the brand would never occur in the same industry without Rebecca, but in the case that we would have to close the space, a restructuring could take place.

This way of structuring the gallery’s business, for “upside” protection, was just one of many practical ways I was able to apply the knowledge I’d gathered over a lifetime of observing my father’s business dealings. During the process of writing this book, a couple other items of note came to mind. One was that when starting a new business, equity is free provided you place your own name or the name of your company in the articles of organization. There are no further capital requirements to suggest equity is to be transferred elsewhere. In a low-interest-rate environment, there are companies such as Sprint, for example, that are paying upward of 8 percent on their debt. Of course, Sprint has the right to pay off its bonds, but it’s in Sprint’s best interest to hold on to cash because the company needs capital for further investment. If a company such as Sprint, with a solid revenue base and a large asset book (although in some financial trouble), were to issue bonds, they would trade at junk valuations. A start-up with no credit, on the other hand, is very different from a company such as Sprint in that there are plenty of avenues through which the new company can issue debt.

Because we are operating under the credit standards faced by all start-up companies, I have further shielded myself from various forms of loss by no longer using equity capital to fund operations. Instead, the operating company issues debt at a fair rate not as low a rate as a company like Sprint could access, but only a smidgen above LIBOR. As a result, the operating company is required to service debt as a portion of capital expenditures before I can receive any kind of salary. This offers the entrepreneur of a small start-up an interesting way to fund operations; it also has the added benefit of being tax efficient, so the company does not need to purchase a depreciating asset or find other means by which to lessen its tax burden.

Although I could write another whole book covering what I have gleaned from the process of writing my father’s book, I conclude with what may be the most important advice my father has offered: always have an exit strategy. I thought about this element long and hard when creating the structure for the gallery and negotiating my agreement with Rebecca. In the case that the gallery does well, Rebecca has been incentivized as a future minority shareholder to buy my equity. I would place her purchases on a schedule according to a predetermined multiple of earnings or a multiple of the gallery’s asset basis. There would be little overlap in terms of who has equity and who does not. In other words, the moment Rebecca becomes an equity partner, a schedule will be drawn for further equity purchases for the total business or expansion, with further debt on a second venture on the same basis as the first. In the case of expansion, a second venture or location would allow for growth, therefore lessening costs and eliminating the need for some of the initial spending on branding and marketing costs. The second gallery could even be one that entertains a different part of the art market—much how the bridge lines discussed in the chapter on Anne Klein and the diffusion lines discussed in the chapter on Donna Karan operated.

Although there are no guarantees, I feel more comfortable and confident having put these particular safety measures in place. A frequently cited statistic says that 80 percent of all small businesses fail within 10 years and half fail within 5 years.1 These figures are hardly comforting for entrepreneurs; however, in the case the gallery does succeed, I will be able to navigate the problems success incurs. On the other hand, if we don’t succeed, the downside measures enacted will protect me from a permanent loss of capital. The drivers for growth, however, are more related to my particular industry and how the art market accepts the gallery’s branding, concept, services, and products.

—Adam Taki

1 Some recent studies have argued that failure rates should be separated by industry and even by geographic region. The January 2011 Dun & Bradstreet US Business Trends Report separates failure rates by sector and state: www.dnbgov.com/pdf/US_Business_Trends_Jan11.pdf.