Good, cheap, fast. Pick any two.

This one is attributed to Red Adair, the famous oil and gas fire suppressing expert.  And boy, does it apply to most of us and our offerings.

“Quality” products and services…

…should not be positioned as “cheap,” or your potential customers will question your message from the start and will be more critical of the delivered product than if offered as one or the other, but not both.

Let’s define “fast.”

“Fast” applies to either service speed (including delivery) or product manufacturing time.  If you as a supplier have plenty of spare resources available, you might temporarily get away with adding “fast” to both other two attributes of good and cheap.

But beware. 

Being fast usually requires having inefficient links or spare resources in the supply chain that can be stretched at comparatively low cost in terms of your overhead cash and offering quality.  If it becomes a part of your long-term sales message, there is risk that you will set expectations you cannot achieve.  And a disappointment based on missed delivery or completion is as great as one based upon trounced quality or price expectations.  This is particularly true if you have been caught up in supply chain issues lately that are well beyond your control, or if you failed to anticipate the extent of these and under-ordered materials.

What if you’re competing as an Internet seller using “fast?”

And if you are an Internet seller, “fast” becomes difficult to offer if you know that Amazon (and perhaps others) offer one or two–day delivery at no charge – and at least Amazon now provides same day delivery of many items in some metro areas.

One answer to this puzzle

[Email readers, continue here…]   So, consider this:  Make “fast” a tool for use as an inducement for particularly important customers or orders, or at times when resources are underutilized.  Offer “fast” when it works for you to close a sale that would not have been likely otherwise.

Back to Red Adair…

Red Adair said, “…pick any two.”  I think it more appropriate for most of us to concentrate upon “good” (quality) or “cheap” (price) and add “fast” as needed to close the sale or fill the resource cup.

There are other ways to describe this.

Our good friend Adam Miller, founder of Cornerstone on Demand, uses words appropriate for software development when describing his version of this “pick any two” quandary.   He describes his choice as “cost, quality or scope. Pick two.”

It is an excellent variation on the theme – selecting from a limited menu of the use of resources.  Note that the only difference in Adam’s shortlist is that he substitutes “scope” for “fast” – but we could just add “scope” to the three we dealt with above to demonstrate yet again that we all have limited resources from which to select our best path.

About “scope” with development-related issues

For software–related tech businesses, scope always creeps, increasing the complexity, disturbing the planned progress, and increasing costs – sometimes dramatically, as projects fall further behind.

The lesson then is that resources are always going to be limited, and that management always must select the most important of the competing outcomes.  It would be worth spending time with your team with someone volunteering to take the unpopular position just to explore the edges of this with speakers for each of the alternatives actively bringing the alternative views to the discussion.

 

Facebooktwitterlinkedinyoutubemail
Posted in Finding your ideal niche, Positioning | 2 Comments

The lion and the ant: A managerial lesson

“Every day, a small Ant arrived at work early and started work immediately, she produced a lot and she was happy. The boss, a lion, was surprised to see that the ant was Antworking without supervision. He thought if the ant can produce so much without supervision, wouldn’t she produce more if she had a supervisor!

So the lion recruited a cockroach who had extensive experience as a supervisor and who was famous for writing excellent reports. The cockroach’s first decision was to set up a clocking in attendance system. He also needed a secretary to help him write and type his reports. He recruited a spider who managed the archives and monitored all phone calls.

[Email readers, continue here…]  The Lion was delighted with the cockroach’s report and asked him to produce graphs to describe production rates and analyze trends so that he could use them for presentations at board meetings, so the cockroach had to buy a new computer and a laser printer and recruit a fly to manage the IT department. The Ant, who had been once so productive and relaxed, hated this new plethora of paperwork and meetings which used up most of her time.

The lion came to the conclusion that it was high time to nominate a person in charge of the department where the ant worked. The position was given to the Cicada whose first decision was to buy a carpet and an ergonomic chair for his office. The new person in charge, the cicada, also needed a computer and a personal assistant, who he had brought from his previous department, to help him prepare a work and budget control strategic optimization plan.

The department where the ant works is now a sad place, where nobody laughs anymore and everybody has become upset.  It was at that time the cicada convinced the boss, The Lion to start a climatic study of the environment. Having reviewed the charges of running the ant’s department, the lion found out that the production was much less than before – so he recruited the Owl, a prestigious and renowned consultant, to carry out an audit and suggest solutions. The owl spent 3 months in the department and came out with an enormous report, in several volumes, that concluded that “The Department is overstaffed.”

Guess who the lion fired first?

The Ant of course “Because she showed lack of motivation and had a negative attitude.”

So the lesson is obvious.  And we see examples every day.  We build our companies with layers of management in the natural course of growth, often quoting that a manager should have no more than six direct reports, or that managers should be freed to do the important, high value work.

We often ignore the ants in our work lives, thinking – perhaps subconsciously – that value equates to salary level, or lowest level workers can be replaced. Or best of all, management generates creative output and pushes that creativity down to the worker ants in the organization whose job is to work, not think.

So in this story, was the lion guilty of just that form of managerial thinking?  Why not see the obvious?  Just add more ants, hopefully as resourceful as the first?  Or is it more complex?  We learn from our experience and education that growth comes from “top–grading” at all levels of the organization. And that the bottom ten percent of the workforce must be replaced, as we hire “A” players.

The story is meant to illustrate one folly of common management.  I’d take it as a beautiful warning to all of us that some things are obvious in business, and that we should focus on what works and reinforce that whenever we see it working.

Be a better lion. Watch for what’s great in each and every ant.

————————————————————————

Responses to The lion and the ant: A managerial lesson

  1. David J McNeil says:

    Is there anyone who HASN’T seen exactly this scenario play out?…. Thanks to Dave Berkus for the reminder.

  2. sbobet says:

    My work with taxon cycles began when I realized the evolutionary history of the Pheidole

    Dave Berkus says:

    “Slobet’s” comment above led me to Wikipedia.”Taxon cycles are sequential phases of expansion and contraction of the ranges of species, associated generally with shifts in ecological distribution.” and Pheidoles are scavenger ants. Not quite sure of the meaning of the comment, but I learned something new with this…

    Excellent reminder Dave. Thank you, again!

  3. Yaniv says:

    To answer your question, Dave, about the source of the parable, it is the Ant, of course. The same Ant with whom the Lion should have consulted, prior to embarking on a misguided effort to replicate her success. Poor thing had to write this parable and broadcast it through social media, just to get her point across. All the Lion had to do was talk to her first, to understand her motivation.

  4. Rick Munson says:

    Dave and all, thank for the valuable lessons in the life of business. What a wonderful world it would be if we were always open to be teachable and in remembrance of our important life experiences. Awareness, acceptance, action and allowance with a good attitude.

  5. Gary Skraba says:

    Outstanding way to put this tendency into perspective!

    Plus, Yaniv is right on the mark: lions really need to get to know their star ant(s) and consider the ramifications of such changes, even if they are consistent with “accepted practices”, which is a lazier approach to process improvement than actually thinking through individual situations.

  6. Cricket Lee says:

    Always great!

  7. sbobet says:

    lions really need to get to know their star ant(s) and consider the ramifications of such changes, even if they are consistent with “accepted practices”, which is a lazier approach to process

  8. Alex says:

    It is unfortunate that the producer gets kick out and the swivel chair managers remained, end result :zero production

  9. Mervin says:

    Thank you for this excellent article. The information has actually
    currently assisted me with my task where I was
    stuck as well as didn’t recognize exactly what to
    do as following action. Eagerly anticipating
    your next messages!

  10. duppydom says:

    This story is much like what usually happens in the corporate sector. The office heads do not realize that it is actually the “ants” who actually run their business. The employees who are considered ants in offices are the ones who work the hardest. And the officials above them in hierarchy mostly don’t realize that. And when it comes to downsizing, these “ants” are ones who suffer the most.

  11. Kala Sridhar says:

    Very impactful story.
    Absolutely right.
    Lions need to recognize the efforts of the ants performers and encourage them.
    Superb corporate lesson

  12. Anu Prabhakar says:

    This one is the best context ever read about the truth going on these days in corporate offices. Yes of course most hard working honest employees are always the sufferers and those who work less and boast more get benefited. And the mobile shop keepers selling such ideas as were followed in lion’s office earn much much more than any one. Maintaining urgent records is different. But making least required reports for the sake of cunning ideas only mars the efficiency of intelligent hard working employees.

  13. Jose says:

    The Ant doesn’t need the Lion, or the cockroach or anyone else for that matter. Just some feedback from fellow ants on what’s working

Facebooktwitterlinkedinyoutubemail
Posted in Depending upon others, Protecting the business, Surrounding yourself with talent | Leave a comment

How credible are you to others?

How do you define credibility in business?

A friend of mine recently told me his story of how his very career rests on his credibility with his major supplier–partners.  He stated that everything rides upon his credibility when he declares that he can produce a quality product on time, especially when his competition has faltered attempting to do so.

There’s little news in that statement… 

…until you hear of the stories of those who destroyed a good thing with one badly executed promise, or one lie, or one slip in quality or delivery.

We often hear that our best asset is our reputation. 

With the number and range of competitors easily available to our potential and actual customers today through a simple Internet search, we cannot afford to waste a single customer because of a missed promise or failure to rise to an expected level of service.  Combine that with the ease of posting reviews, both good and bad, and we find ourselves in a microscopic ecosystem where small individual failures are often rewarded with massive negative blowback.

[Email readers, continue here…]  And we all know that once posted, a bad comment or review cannot be erased and remains forever.

And your promises?

You represent your company (and yourself) with every promise you make, whether as small as a date–certain for delivery or as large as a significant contract based upon expected quality and service.

Think of your competitors. 

If yours is a B–to–B relationship, you will have salespeople from the other side of the fence watching your every move, anxious to exploit every misstep.   And if yours is B-to-C, then customers will make their opinions known with their reviews for all to see.

It isn’t human nature to think of your personal and corporate credibility whenever you offer any sort of terms for price, delivery, quality or service.   But in this world of rapid communication and persistent information, you should do just that.

Facebooktwitterlinkedinyoutubemail
Posted in Depending upon others, Positioning | 1 Comment

Finding “stinky clauses” in legal investment documents

Here’s the problem:

Investors sometimes join into investment rounds that have been pre–negotiated by others, receiving the paperwork already created by attorneys from that negotiation.  It is not uncommon for a sharp investor to discover a “stinky” clause or two in such agreements when reading them in preparation for signing.  Bill Payne came across just such a stinky clause in a deal we both were joining as investors late in the process.

Can you change a deal if not the lead investor?

Changing the deal that late in the game is nearly impossible, after other investors have already completed their documents and the deal is supposedly put to bed.  So, what does the latest tag–along investor do?

Passively sign and hope for the best?

You can tell from the title of this insight that the usual result is to passively sign while holding the nose, a trick perfected by experienced investors suffering this malady not for the first time.

But what if the principals find this at the last minute?

What if it is the company attorney or entrepreneur that finds the stinky clause so very late in the game?  How do you confront the investors who have already agreed to terms and even perhaps signed their documents?  Is it worth risking the deal to negotiate a late change during the equivalent of the ninth inning?

Here’s the test to use if you are impacted.

[Email readers, continue here…]   The answer is obviously in the importance of the issue to the person discovering it.  In most cases, the probability of whatever the clause being triggered sometime in the future is slight, and therefore the risk remote.  So, it is a bet against the event made with chance on your side.

Watch out for what might be a future challenge.

Then again, it is those improbable future events that end up causing lawsuits years later, often just because a party to an agreement did not understand the implication of a clause or even a document.  We hire attorneys precisely to help us prevent future conflict by resolving issues before they happen.

So, how do most of us respond to a stinky clause?

Most of us will let the matter slip and sign while holding our nose, a feat in itself (holding the nose, paper and pen at the same time).  Some of us will pass on the deal rather than confront the issue, especially if it is an important one to the late signer.  And that often happens when just such an issue has bitten the candidate investor in some past deal, making the likelihood of such negative reaction higher with sophisticated, long- time investors.

Maybe there are skunks in the woods that don’t even know they smell.  Or maybe there are targets in the woods without the capacity to even catch the odor of a bad negotiation or deal documentation.  Either way, there are risks in deals we sometimes never catch – that later catch up to us in the most surprising places and times.

Facebooktwitterlinkedinyoutubemail
Posted in Raising money | Leave a comment

What if you and your investors don’t agree on an exit?

First, the implied promise:

Taking money from professional investors such as angels or VCs usually requires that you agree to seek an exit for those investors in your plan, often targeting five to seven years as the ideal period for growth before a liquidity event.

Of course, even though that is your contract with the investors, way over half of those implied contracts never work out that way.

What if you later decide to just keep control?

It is perfectly OK for you to want to grow your company and plan to keep control for you and your offspring, with no intention to sell.  There’s a name for this.  We say that you are growing an evergreen enterprise, one in which outside money is to be taken in the form of loans or royalty agreements, not shares of stock or ownership.

Investors will not be happy and will usually react.

Of course, you will find yourself in opposition to your investors and some of most of your board members if you do this after taking outside investment.  There are clauses in preferred stock investment agreements allowing the investor in many cases to “put” the shares back to you at the purchase price plus dividends or more after a period, usually five years, if no effort is made to find a buyer or begin the IPO process.  Although rarely used, these clauses do give the investors power over your decision to turn your business into a lifestyle project.

If you have no intention of giving up ownership or even control over time, state that early and plan accordingly.  Assume that your sources of funding will be greatly limited to loans, sometimes at high interest rates and requiring personal guarantees and even security in assets.

The advantage of creating an evergreen company.

[Email readers, continue here…]   One thing that becomes obvious when there are no investors looking over your shoulder is that you can plan for a pacing of your growth, focusing upon long term strategies that might be very comfortable for you but not so much for outside investors.  (You may recall my story of the company that was forced to grow to death by a famous venture capital investor expecting massive profit or nothing, with no expectations in between.)

A personal experience that relates

I also recall vividly one of my first investments where the entrepreneur backed out of a sale to a well-known investment company at the last second, declaring his intention not to sell “his” company.  I was able to negotiate a “put” of my shares back to the company at 5x my investment.  Both of us were happy, but that outcome is rare.

More advantages to not taking the money at all

Evergreen companies can focus upon profit as more important than rapid growth, upon customer service above immediate profit, and upon people first before all of these.  For some, that comfort is worth forgoing building high equity value.

In fact, sometimes entrepreneurs will do better financially just taking profits over the long run then they might have by building equity for an ultimate sale.    And a smaller sale of the company later when the founder retains 100% of the equity may well compensate that founder with more than if outside money had been taken early on.

Facebooktwitterlinkedinyoutubemail
Posted in Ignition! Starting up, Raising money | Leave a comment

Don’t just raise money. Do it on good news!

Why is this important advice?

Because the first rule for raising money is to do it on good news – right when sales are increasing at an accelerating rate.  Or when a major customer signs a significant deal.  Or when something happens that makes an investor think this company is about to break out.

What if you have no good news to offer?

Unfortunately, the longer you wait without significant upward news, the harder it is to get attention.  It’s human nature for investors to want to buy into a fast growing future, proven by some event in the immediate past.

So, here’s the rub.

Raising too much too early dilutes the founder interest to unacceptable levels.  In recent years, I have counseled founders to raise enough to accelerate to a significant milestone that is over a year away, and to scale the business to find breakeven with two early rounds if possible.  Once at breakeven, the rush to raise more is over, and there are far more options available.  Tech businesses today can do this much more easily than a decade ago, with cheaper development costs, SaaS hosting environments avoiding heavy equipment costs, and development platforms with pre-formed routines available.  While working toward good news events, some entrepreneurs plan to take in consulting work to pay some of the costs during the early stage of a company.

Where to look if you just don’t have any good news?

If you have been in business for a while and don’t have significant good news to tell, I would make a list of possible strategic investors, people or companies that would benefit from your product or service.  They will be immune to the disinterest shown by financial investors.

Facebooktwitterlinkedinyoutubemail
Posted in Ignition! Starting up, Raising money | Leave a comment

The best advice startups will never follow

Dave’s note:  This is a reprint of a 2015 insight that seems to have struck a chord with investors and entrepreneurs. None of this advice has changed…

Let me tell you a few short hair–raising stories of entrepreneurs who have raised money and regretted it later.  Here are some rules that entrepreneurs almost always ignore to their future peril.

Don’t take money from relatives who can’t afford to walk away without remorse.  

Do take money from experienced family members only after you ask them if they are sure three or more separate times.  By the third time you can be sure that they aren’t being overly emotional or feel they can’t say no.  Also, if things go south, they are more likely to remember that you weren’t pushy and that you gave them three or more separate opportunities to say no.

There’s a common expectation among entrepreneurs that seed money from family is great – letting close relatives in at the ground floor.  The problem, of course, comes if the business fails.   Some relatives believe that a family bond is an insurance policy, and that all investments or notes will always be repaid, no matter what the circumstance.  Consider whether the family member being asked to invest has the capacity to walk away “happily” from a lost cause.

Don’t take money, especially start–up loans, from unsophisticated investors.  

I was a co–lender and assumed the chairmanship of a young startup where the entrepreneur’s cousin also loaned money under the same terms.  When the business failed, the cousin sued his own relative, me, my wife (who didn’t even know the names of the players), and even my family trust (an estate planning vehicle with no separate assets.)  It took several times the value of the cousin’s loan in legal fees and settlement just to extradite my interests from a suit that had no merit – but would have cost hundreds of thousands more just to get to trial.

Do take loans from sophisticated investors only after you have tried everything to get them to purchase equity…

[Email readers, continue here…]  …and always with clear wording on automatic loan extension if you are making progress but need additional time to meet the full set of goals.

Don’t talk yourself into a high valuation for the first round of financing for any reason…

…even if your hair is on fire and the idea is worth billions.   This lesson is one that is not only hard to teach, but ignored by entrepreneurs on a regular basis.  Early investors who don’t have the experience to compare value or ask tough questions accept the word of their entrepreneur as to valuation.  Later investors will enter that picture only after insuring that valuation is reasonable and comparable to other opportunities for their money, but often will walk from a deal if the valuation for earlier investments was so high as to cause pain for that cohort.   It’s just not worth the effort to argue with early investors when there are so many other deals calling for the sophisticated investor’s money.

Try not to take “dumb money” where the investor or lender supplies nothing other than cash.  

There are five attributes of a great investor (see my book, “Extending the Runway”), the money they offer at reasonable terms, their ability to guide you with advice about the context of your business plan in relation to the marketplace, their experience in the process of growing a company, their knowledge of how to best use corporate resource time, and finally, access to their extended relationships with others who can help speed growth.  Those four additional assets are worth as much or more than the cash offered.

Don’t walk away from rejection by experienced investors thinking that they are stupid or just don’t get it. 

Most of us in this world of early-stage investing have seen thousands of proposals, good and bad.  Even if we don’t seem to get your brilliant idea and buy into its value, we may be comparing it to previous lost investments or industry experiences far beyond yours.

Do ask three sets of progressively deeper questions to get down to the heart of why they didn’t invest.  

Every contact should be a learning experience. And those with sophisticated investors are doubly valuable.  A well–phrased ‘no’ could well be a step toward a correction of course and a later ‘yes.’

Facebooktwitterlinkedinyoutubemail
Posted in Ignition! Starting up, Raising money | 1 Comment

If you’re lucky enough: Celebrate your exit!

How might you view your successful exit from the company you have spent so much effort to build?

You’ve worked hard for years to reach the payoff, and the money sure looks good as you contemplate the wire transfer to come, and then watch your bank account fill to a level you only dreamed of during those rough cash flow years.  You might even allow yourself to admit that you almost lost it all several times during this long run, and that only you knew how close you came to the abyss.   But you did make it, and that’s what counts.

Your set of complex emotions

Whether the exit was as large as you hoped, or whether your goals of taking care of all the people who helped you get to this point were realized, the exit itself generates a complex set of emotions in all of us.

First there comes a sense of relief and maybe guilt.

You no longer need to worry over daily cash or threats to your net worth.  Then you experience a feeling of guilt when you realize that not all your early associates share the same outcome, either financially or perhaps with their continued employment with the buyer.

Then the money…

Then you focus on the money in your bank account, smiling at the accomplishment of accumulating assets that are tangible and can be valued, perhaps for the first time.

[Email readers, continue here…]   But what about the pause to celebrate?

What most entrepreneurs fail dramatically at is to celebrate the moment.  To celebrate with those who took the journey with you, with those closest to you who sacrificed as you spent those long hours away. To celebrate with your suppliers who helped you, especially during the rough times.  To celebrate with your customers, who worry over continuity and look to you for assurances that the transition will not negatively affect them.  And to celebrate for yourself, for making it all the way to the finish line.

…and consider those whose exits were not so great.

Not many founders or entrepreneurs do experience the success of a favorable sale of the business they dreamed would make them rich.  Many fail multiple times.  Some fail in the first year of the attempt.  Others are diluted by subsequent investors to the point where there was nothing for them to celebrate at all in a sale.

So, as you prepare to turn over the reins to another; to separate from a business that has become a part of your being, it is time to think of nothing but the good done, the examples set, the positive company culture you leave behind.

Remember the lessons learned, and friendships gained.

As you begin to focus upon the future, remember the emotions, the lessons, the lasting friendships from the past.  I often advise managers, CEOs and entrepreneurs always to part on a positive note and never burn the bridges of any past relationship.  You’ll never guess whom you’ll meet in your next act, and how they will be able to contribute positively to your next success.

Take time to reach out.

So, celebrate your exit by reaching out to as many of those who’ve helped along the way as you can.  Close this chapter of your life on the highest note possible.  Take a long breath.  Then do as all good entrepreneurs do.  Start dreaming of the next big idea.  Take with you the best wishes from those in your past and build upon the education you received with this effort.

Here are some thoughts for you.

Write a book. I did.  Write a handwritten letter to someone who helped you make it to the finish line. That extra effort will shock and please them.  Call an early key employee and take that person to dinner as a thank you for those hard times.

Hit the beach.  Pay attention to your family.  Think about investments and tax efficiency.  Go into a mental dark room and dream about your next act.  Take a long breath, or weeks of long breaths. Exhale slowly.  This is what a moment of reduced pressure and responsibility feels like.  Savor that moment.

Then if it strikes you as right, start the process all over again.  May you have only the greatest success in your next act, whatever that is and wherever it takes you.

Facebooktwitterlinkedinyoutubemail
Posted in The liquidity event and beyond | 1 Comment

VC investors: Don’t be greedy even if you can.

First, the marginal exit event:

Sometimes the end game or sale of the company is not a happy event for the early investors, including the entrepreneur or the founders.  Especially when outside investors, venture capitalists or angels have put in substantial money, and the sales price is not enough to give them a reasonable return for the time and money invested, these investors can be – in a word – greedy.

The order of liquidation or payout

Most sophisticated investors will take either a promissory note or preferred stock, both of which come before founder or management stock in a sale or liquidation.  Promissory notes come before any equity, and most late equity investments come before early equity investments, even of the same class of security.  This makes for some head-rubbing when attempting to calculate the return on investment with a proposed sale.

…and there are those accumulated dividends.

Further, preferred stockholders can be recipient of accrued dividends in a sale or liquidation.  A rather common but small dividend rate of six percent becomes a massive amount after seven years, almost half again the value of the original investment.  And some preferred investors have participation rights, where they take all the above amounts, and then also convert their shares into common stock and participate again alongside the founders and option holders.

Sometimes it takes a court case to unravel onerous terms.

It is in this combination of possible methods of amassing a return that greed can become a significant factor, so much so that the courts are sometimes stepping in to void some of the most onerous terms of investment agreements when challenged by those locked out of payment in a sale.

Here’s an example that will make your heart skip a beat.

[Email readers, continue here…]  Take a situation where the VC investors finally see the chance of a return after ten years, with participating preferred and fifty percent of the ownership after several rounds.  A marginal sale at twice their original invested amount could yield a starting value of eighty percent of the sales price due to the VCs (fifty percent invested plus accumulated dividends for ten years at six percent which equals thirty percent of the sale price) and then fifty percent of the remaining twenty percent after participation. The result is that the preferred shareholders would receive ninety percent of a sales price (nearly was double their investment), compared to the remaining ten percent shared by the founders and all others, including angel investors and option holder-employees.  Ouch!

No-one complains if the sales price is ten times the investment since there is plenty to go around.  It is in these marginal sales that the formula distorts returns so badly in favor of the investors.

Sometimes these investors volunteer to be fair to all.

Fortunately, and perhaps because the courts have not looked favorably upon these overwhelmingly one-sided outcomes, many VCs will voluntarily forgive either accumulated dividends or participation in a marginal sale, especially if the sale is cultivated, planned and carried out by the efforts of the common shareholders including the founders.

One tool often used: the “cutout” for management

Although many VCs are openly against allocating a “cutout” for management in marginal sales, practically speaking, management must be taken care of in marginal sales, or the sale might not happen at all.  In a cutout, some percentage, usually fifteen or twenty percent of the total sale, is allocated to management to continue operations through the closing period and help in closing the sale.  That further reduces the amount available to founders if not still in the ranks of management.

Here comes the headline:

So, this advice is directed to those investors.  Don’t be greedy even if you can.  You will not be moving your IRR needle enough by grabbing a few extra dollars in a marginal sale, but you will incur the wrath of a number of stakeholders who would be more than willing to spread the word far and wide about your greedy ways.  And that reputation will last for a long time in the entrepreneurial community.

Conversely, I have praised and seen others praise VCs who volunteer to eliminate participation clauses even before knowing the ultimate sales price in a deal.  It is those investors who receive the loudest accolades since they have given up a right for the good of the rest of the investor and management community.

Facebooktwitterlinkedinyoutubemail
Posted in Depending upon others, The liquidity event and beyond | Leave a comment

My hard-earned lessons from negative exits.

In my life as an early-stage investor, I’ve been closely involved with so many businesses, there were bound to be numerous stories of  actual and near failures, hopefully from which to learn lessons for all of us as we go forward.

The emotions we feel when “turning out the lights.”

Several times in my investing life, as the final board member making the arrangements to dispose of remaining assets, I have literally been the one to turn out the lights, carry out the documents, books and records to my car, and become the only remaining contact between the failed business and the investors, bankruptcy court, or creditors.  I volunteered to do this several times when there was no-one else, even the founders, to do this.  And these were emotional experiences to say the least.

We ask ourselves “what if?”

In aviation circles, we read in our pilot magazines about “Never again!” or “I learned about flying from that.”  Pilot-authors tell their stories in the first person, and all of us readers slow down to think while reading of these events, wondering “what if” or whether this could happen to me.  And if it did, would I have reacted differently?  Most importantly, we think: ‘Now that I know this, would I behave differently if it did happen to me?’

How about the entrepreneur -founder?

Professional investors rarely attach a red letter upon a failed entrepreneur.  In fact, if that person can tell their story and relate the lessons learned clearly, there is a positive response many of us will make to the next pitch from that person.

Investor pattern match

[Email readers, continue here…]  We who invest look for patterns from previous experience.  Some of those patterns help us to spot and avoid problems we have seen play out in the past, often to disastrous conclusion.  We learn to worry over obsolete inventory, too rapid hiring, failure to spot industry trends that make an offering less attractive, and so much more.  Most of us can tell specific stories of losses that led to these expensive and gut-wrenching lessons.

Here’s a near miss that just happened.

I just helped an entrepreneur to consider reorganizing his young business from being a value-added reseller into a software and consulting company.  It would not be handling the expensive hardware that is part of its required sale at all, other than to recommend alternatives and charge for coordinating the purchases of differing supplier products, oversee the installation. It could then charge for setting up, integrating, and training the company’s software, all because its customers would not know how to do any of these important tasks.

This follows from my previous insight: “Where there’s mystery, there’s margin.”

Asa result, the entrepreneur could avoid a fundraising effort, reduce working capital, make friends with the salespersons of multiple companies that could supply leads and references, and become instantly profitable.

Some fatal elements that might become only a near miss.

So, what if that startup could not have raised funds? What if it had a hiccup in collection of payment from a large hardware order?  What if the hardware manufacturer had serious problems with product quality on site?  All these things which could have driven the company out of business when betting very large amounts on other companies’ hardware would be avoided.

Why do we tell this story?

Turning out the lights from a company following an existing business plan to extinction teaches us lessons.  Pre-thinking alternatives to the events causing the negative exit might just prevent it.  Which would you rather do?

Facebooktwitterlinkedinyoutubemail
Posted in Hedging against downturns, Protecting the business, The liquidity event and beyond | 1 Comment