Why not share your liquidity success with those who got you there?

So, you are close to selling your company, and counting the profits a bit early. Well, that’s human nature.

Here’s a thought for you to recall later when and if the event happens.  Remember those who got you there.  And for tax reasons, remember them before the closing of the deal, so that you can do so by sharing a bit of your proceeds without paying personal income tax upon those amounts.

Formal option plans for some

Some companies, especially those financed by angel or VC investors, have good, formal stock option plans with properly priced options set to reward all employees and managers in the event of a corporate sale.  Usually, the higher the ranks, the more the options held and therefore the greater reward at exit.

And a lack of plans for others

If there have never been outside investors to organize such an option program, many CEOs never get around to creating a system for rewarding employees in a sale.

I found myself in such a situation upon a sale of my computer software company.  There was no question that each of the five vice presidents had been greatly responsible for our success and getting us to the successful exit.  Yet there was no formal reward in place other than the employee stock ownership program (ESOP) which was set to pay all employees for their accumulated shares at the exit.  So, I wrote into the final distribution instructions a surprise five figure bonus for each of the five executives.  Each was surprised, pleased and effusive.  Upon reflection, I should have given each even more.

Consider the kinds of exits

[ Email readers, continue here…] Now, there are three kinds of exits.  Those that pay off handsomely (congratulations if so), those marginal exits that selvage technology, brand and jobs – better than nothing.  And those that are total write-offs in which no one except perhaps the bank and lenders receive anything.

The marginal exit is most difficult, and it would be rare for an entrepreneur to willingly share with other managers.  But the exit we celebrate, the one where the returns will change our lifestyle, are the exits where the founders with the most gains should consider how they got to this point.  We should all recognize that we did not do it alone, and that even generous stock options may not well-enough reward those who are direct reports and have done the most amount of heavy lifting.  Why not consider a surprise addition to the payout from your (perhaps) most-generous portion for those important contributors to success?

It is rewarding and more than fair to share the success with those who got you there.

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Posted in The liquidity event and beyond | 1 Comment

Everyone wants to leave a legacy.

Be honest now.  Have you ever thought of what legacy you’ll leave behind?  If you are an entrepreneur or CEO, surely you’ve thought of how you’ll be remembered by your associates and stakeholders after you move on.

Bad boss examples aren’t forgotten

 We’ve all heard the stories of tough SOB bosses that took advantage of employees, vendors, even stock holders.  And such stories do get around.  How many people who know those stories are willing to trust their next chapter to that person’s next act?

Simple actions sometimes return immense payback

In my past, I made it a practice to hold exit interviews personally with nearly all separating employees, gaining insights from them they would not be willing to share while still employed with the company. And invariably, I’d end each with a handshake and the admonition: “I want us to part as friends. We never know how we’re going to meet again, perhaps with the shoe on the other foot.”

I did not know for many years, until a most successful reunion planned by my former executives bringing back over a hundred past employees, how much that and other signs of respect and dignity for the employee-associate made our workplace rare and desirable.

That extra effort does pay off

[Email readers, continue here…]    I used to receive a list of birthdays for the next month from my assistant, culling the information from the corporate books spanning offices in many countries.  Once a month, I would maintain the ritual of going to the local gift shop and buying enough birthday cards to fit each employee or associate.  And once a month, while watching TV, I spend part of an evening writing personal messages to each birthday employee, recalling an event or complimenting a behavior or success.  Such amazing accidental returns for such a small gesture.  Even today, years later, I am met at industry events by former employees with a common refrain, “Our company was the best employer I have ever had, before or since.”

It’s all about respect and recognition

That is a legacy you cannot buy, at a cost of acknowledging individuals with respect and personal recognition.  And what do I remember about that ten-plus year experience, among the thrills of rapid growth, great workplace, and great lucrative exit?  Most of all, it is those personal moments of contact with former employees, each recalling with appreciation their time at our company.

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Posted in Depending upon others, The liquidity event and beyond | 1 Comment

Take advantage of the good times to build stakeholder loyalty.

Loyalty is a hard-earned commodity

There are several times when stakeholder loyalty is tested to the limit.  For employees, a late or missed payroll is the ultimate test of corporate loyalty, divorced even from an employee’s ability to make do without a paycheck.

For investors, a subsequent down round at a lower valuation than the last, or an exit opportunity at a loss are all opportunities for the affected stakeholder to show a side that can sometimes shock an entrepreneur or CEO.

The chasm between management and employees

Managers almost always believe that stakeholders understand the pressures of the business and the circumstance of the present.  The truth is that many employees merely make a simple pact: timely pay for time in service.  If there is no closer connection to the corporation, when times are tough for any reason, it is these employees that make it tough for management to gain understanding and consent for actions that must be made such as missing payrolls, making layoffs, or abandoning pre-announced plans.  And it is that disconnected employee, usually one or more of the better performers, that starts looking for a job when times look bad for a company.

Investor loyalty is most tenuous of all

[Email readers, continue here…]   Sometimes a secondary fund-raising effort leads to a lower valuation than the last.  Although the investment documents from the previous round call for each investor group to vote as a class for or against new rounds of funding, in a contentious environment even a company in desperate need of new funding may find itself warring with its investors.  I have seen investors allow a company to die, rather than suffer the massive dilution of an offer by a new investor.

And I have seen good offers from buyers of a company blocked by investors whose vote is needed to enable any such transaction, usually because these later investors would have a less-than-stellar exit with the sale, even if the founders would make out extremely well.  That one hurts early investors and founders more than perhaps any other action by investors.

Simple building blocks for difficult times

The message here is simple.  By keeping stakeholders close with constant information as to the progress and even stressful setbacks, and by never withholding bad news, stakeholders will be in a much better position to understand necessary actions by senior management and accede to decisions made in the best interest of the company, even at the expense of self.  This kind of loyalty is never created during the bad times when everyone is thinking only of protecting self.  Take advantage of the good times to build such loyalty.

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Posted in Depending upon others, Surrounding yourself with talent | 1 Comment

Can we have fun while doing serious work?

Have you ever noticed how slow time passes when you are in a troubled environment?  Conversely, sometimes you look up at the end of a great day and wonder where the time went.

It’s driven from the top

Over the years, I have discovered that the difference is not just applicable to the good times, but to the environment, created by the senior executives, that filters throughout the organization.  Every time, a corporate work culture encouraging humor causes employees to enjoy their work, spend more time with associates, and laugh many more times through the day.

One of my most memorable stories about workplace fun

At one point in our mutual careers, my brother located his growing architectural practice just a mile from my record company in West Hollywood, California.  I would visit his office and immediately notice an atmosphere of “joyous creativity” throughout the organization.  Every cubicle was decorated with whimsical drawings, posters, kid’s creativity, and more.  As I walked through the facility, I could hear laughter emanating from cubicles, almost constant as a background song of simple joy at work.

[Email readers, continue here…]  Those visits were wonderful times to recharge my batteries, and I was not even a part of the company.  Imagine how they affected the attitude and creativity of those working there.  Think of how clients loved to associate with their counterparts in such an environment.

It’s not easy to create and maintain such a workplace

Try as I could to reproduce such an environment, my company was too spread out, the background noises of manufacturing too loud to make the same environment possible.  The best I could do was touch individuals and small groups with that same joy of the journey, adding humorous opportunities for lightening up as often as possible.

But after all these years, I will never forget the magic of that architectural office, and how much everyone there wanted not to let it ever slip away.

Take every opportunity to lighten up, to ease the often-self-imposed pressures of constant work, to unlock more of the creativity of your workforce through the use of appropriate humor.  What a lift that brings.

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Posted in Depending upon others, General, Surrounding yourself with talent | 2 Comments

Will your company’s sale be celebration or silence?

First, there are at least three types of exits

I’ve been involved with well over twenty successful exits and four initial public offerings over the years, some of them with monstrous gains, some more modest.  Then in addition, there are the exits that returned some portion of capital, but nothing more.  And finally, there are the thirty-plus sad exits that were complete write-offs for the investors, sometimes regaining some portion of note-holder or creditor money in the process.

The great exit and celebration

I can tell you with great enthusiasm that the high gain exits are by far the most enjoyable in every way.  There’s almost always a closing party where the board, prime investors, attorneys and investment bankers all get together to celebrate the victory.  It is an exhilarating ending to a great journey.  The entrepreneur, whether remaining to the end as CEO or not, is celebrated for his or her prescient timing, great vision and excellent execution of the plan. We even themed one such exit party as “We stuck the pig!” – the overly enthusiastic celebration of an outcome larger than expected.

But the silence…

I cannot recall ever attending a closing dinner for a sale in which we returned only a portion of the investor group’s money. In fact, I don’t recall any formal post-sale meeting at all; even to digest the lessons learned from the entire experience, a missed opportunity for all.

Sometimes, there is embarrassment or shame

[Email readers, continue here…]  There is that sad truth that the large percentage of early stage investments die an unceremonious death, often with the entrepreneur-founder left with a bitter feeling that “if only” there had been more cash invested, more co-operation from board members, more time to get to market, more of something, then the outcome would have been much better for all.

Failure, or learning opportunity?

Sometimes the entrepreneur who believes s/he has failed the investors apologizes. And sometimes s/he lashes out at the inequity of it all.  That’s a shame, and a missed opportunity for a learning experience for the entrepreneur and investors.  Every failure creates a story with a lesson to learn.  That story should be told, lessons evaluated, and added to the experience base for all who participated.  Because, many of us investors will give a bonus instead of a pass when considering a second startup from the ashes of a failed team.  It is not likely that they’ll make the same mistake twice.  And usually, such an entrepreneur is more careful with the use of cash and time the next time around.

The benefits of a good exit

Of course, a “big hit” successful outcome is preferable for all.  But more importantly, a good exit marks a passing of a successful journey by a team first formed by a visionary entrepreneur, usually attracting smart money from good investors, who together effectively planned growth and finally a great exit.

Whenever those forces come together, celebrate them and the team that brought them all together.

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Posted in The liquidity event and beyond | 3 Comments

Another personal story: Timing is everything in a sale.

Almost anyone who has sold a company has a story to tell about their good deal, the problems with the buyer, a last-minute change of terms, or more.

I have saved this next story until now because it is one of my favorites, and certainly illustrates the point about timing being a combination of luck and skill as well as anything I could devise from fiction.

The background for my story

The year was 1998. After presenting a “state of the company” report at a national meeting of resellers for a company where I sat on the board, I was approached by one of the audience members, complimenting my presentation and stating, “I have a problem.  I’ve been offered $15 million for my company and my partner is suing me for all I am worth. What can I do?”

The fabulous contradiction – and opportunity

I promised to come and see him at his office the very next week.  What I discovered was a contradiction that was too intriguing to ignore.  The company of eight was engaged in web design, which, early in the growth of middle-sized business on the web, was hot at the time.

And yes, his partner had a valid suit, having been locked out of the web-design business and denied access to decisions and accounting information. But the real asset became obvious to me at almost exactly five PM that day, when all eight stopped what they were doing and began using a tool they had licensed from a Florida company to find other Internet gamers to join them in playing intense first party shooter games over the ‘net.

The tool it turns out had been posted on the company’s website and downloaded by over a million gamers – a big number at the time when – just a few years earlier, AOL had passed its first million users. Over a million of these gamers clicked to the company’s game web site each month for new information and to form an early Internet game community.

How the industry was growing around the company

The company made little effort to charge for the software or community.  Microsoft had just bought Hotmail for $9 per registered user; AOL had just bought ICQ for $40 per registered user.  And here were over a million users, with no apparent value to the web designers, except as a community of friends with similar interests.

The surprise I could not ignore

[Email readers, continue here…]  I did forget to tell you that on that day looking into the company’s books I discovered that neither the company nor its founder had filed Federal income tax returns during the three years in business, didn’t I?  And there were other quite obvious problems, unattended to, along with the partner’s suit hanging over their heads.

My immediate reaction and offer

I immediately agreed to come aboard at no cost to clean up the corporation, deferring my investment until that was done.  I negotiated a settlement with the partner for $100 thousand which I paid, then filed all of the overdue tax returns of various types, and cleaned up the books.  Offering to reincorporate the game company as a new entity to avoid any more surprises, the entrepreneur and I negotiated 10% for my $100 thousand, with the remaining 90% for the founder.  In addition, I loaned the new company $150 thousand for working capital.  By this time there were not one but four million registered users.

And then, unbelievable value growth

Within three months, we easily obtained $3 million of investment at a pre-money valuation of $30 million.  Can you begin to tell that this is a story of timing, and of the Internet bubble?  Three months later, another investor company in the business offered to invest $3 million at a valuation of $60 million.  Two months after that, a French game company offered $1.5 million at a valuation of $80 million.  Of course, we took all of these.

We now jump forward to February 2000, 14 months after formation of the company.  Another major competitor in the industry, directly competing with one of our investors, offered $140 million for 49% of the company in a combination of equal cash and stock in its public entity, valuing the $1 million company at $285 million just a little after a year from incorporation.

That pesky timing issue

Fast forward a month to a meeting between a senior executive of the buyer, our hero the entrepreneur, our corporate attorney and myself.  It became obvious during that meeting that the buyer intended to operate the company as if it alone was the owner-manager. Our entrepreneur balked at the boldness of that statement. Everyone withdrew to consider a response.  And so, a mere month before the crash of the Internet bubble, the buyer withdrew the offer.  Even if some of us were unhappy with what was almost a home run opportunity lost, we went back to the work of building the company value.

And a month later the Internet bubble burst.

Recovery and success

It took almost four years to sell the company for over $60 million, not at all a bad outcome for us founders and the early shareholders.  And I do need to note that the entrepreneur in the meantime became a model executive of our still-growing company, much more mature and understanding of market forces than that fateful day in February 2000.

Could I have found a better example of “Timing is everything”?  The lesson: Look for cycles in your business and in the marketplace.  There are natural high points in one or both that may not be obvious until looking back.  But they occur often enough to watch for and take advantage of if ready to make the run for a liquidity event.

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Posted in General | 3 Comments

Can you list ten buyers for your business?

Most entrepreneurs and certainly all investors would like to see “a positive liquidity event”  (a good sale of the business) someday.  Boards of directors should be aware that one of their duties could be to evaluate offers from potential buyers, or even to initiate efforts to sell the business for the benefit of all stakeholders.

So, that’s the reason for this insight.

An exercise for you and your board

I perform the following exercise with my boards no less than once every several years in planning sessions attended by the board and senior management, sometimes augmented with an industry consultant or expert from the outside.

Here is how we do it:  We use a white board or projected PC spreadsheet visible to the entire group.  We draw and label four columns and ten rows.  The columns: “Name of candidate buyer”, “What they want”, “What we want” and “Likelihood”.

The brainstorming session

Then we begin a brainstorming session, in which we fill in the ten rows with the names of ten potential purchasers of the business, looking deeply for strategic and emotional candidates (see last week’s insight.)

The important “column two”

[Email readers, continue here…]  Once the names are filled in column one, we return to the list and use column two to have the group do its best to divine what it is about our company that would most attract the buyer if the potential buyer had perfect knowledge of our business and its resources. This could be our intellectual property, our geographic reach, our superior product, our management team, or perhaps our dominant position.

Final, quick completion of the exercise

Then I guide the group to focus upon column three, ignoring the obvious gain our company would make in liquidity (cash) to shareholders.  We list what our company would most gain in new resources from this acquirer.  Would it be more cash for expansion, new intellectual property, better distribution, completion of drug trials, or more?  And finally, I have the group put a number in column four, estimating the likelihood of such a sale ever being consummated with that potential buyer, with “10” the absolute highest and “1” unlikely to occur.

The magic of the exercise

Not only will group focus upon the possibility of a liquidity event, it will begin to focus upon a number of possible buyers.  But it is in revisiting column two of the chart that the most insight occurs.  Without exception, when performing these exercises, the group quickly notes that at least four of the ten candidates, if each had perfect knowledge of our company and its resources, would want the very same thing in our firm from an acquisition.  Whatever that is, it shines as the true core competency of the corporation, whether previously expressed or even recognized by management and the board.

What to do with the information

There are two near-term outcomes from the exercise. First, the board and management should see that it is in the company’s best interests to redirect resources such as manpower and money into the resulting evidence of true core competency revealed by the duplication of entries in column two (“What they want”), in order to build value more effectively and quickly than in any other area of the enterprise.

Second, it is a blueprint for the CEO to reach out and introduce himself or herself to the CEO of the target company, never discussing more that just an introduction, not to even mention a business transaction.  Awareness is the principal goal.  Future conversations may take a more nuanced direction, but not driven by our CEO.  Let the other person, by then comfortable and more knowledgeable, make the first move.  Or, if we are at that time “making the run” for a sale, then the CEO can drop the hint that the company might be “in play” or the object of another firm’s attention.

Occasionally, the insights gained from this exercise comes as a complete surprise to the board and management.  And that is most rewarding to see.

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Posted in The liquidity event and beyond | 1 Comment

Selling your business? Find the emotional buyer

This is one of my favorite insights, since I lived this one in a positive exit from my computer business.

Types of business buyers expanded

Most people will tell you that there are two kinds of eventual buyers for your business: financial and strategic.  A financial buyer will analyze your numbers, past and forecast, to the n’th degree, and calculate the price based upon the result, after carefully comparing your numbers with those of others in the same and similar industries.  The object of a financial purchase is to negotiate a bargain, capable of payoff through operating profits or growth over time, or even of immediate profit from arbitrage – knowing of a purchaser that is willing to pay more for your company if repackaged, or even with no changes at all.

The strategic buyer

A strategic buyer is one that understands what your company has to offer in its marketplace, and how your company will add extra value to the purchaser’s company.  Strategic buyers look for managerial talent, intellectual property, geographic expansion, an extension into adjacent markets – and more – that will be achieved with the acquisition of your company.  Such a purchaser usually is willing to pay more to secure this new leverage, understanding that the value of the acquisition is more than the mere financial value of your enterprise.  Most investment bankers will coach you into helping them find you a strategic buyer, knowing that such sales are quicker, often less focused upon the small warts of a business, and yield higher prices than financial sales.

And the emotional buyer

There is a third class of buyer I discovered first hand when selling my company – the emotional buyer.  This rare buyer needs your company.  He must have you or one of your competitors, and now.  The buyer may be a public company attempting to defend decreasing market share and being overly punished by Wall Street.  You may represent the only obvious way to protect against obsolescence from a buyer’s declining marketplace, or failure to compete against others with better, newer technologies.

[Email readers, continue here…]  You may be a most successful direct competitor, one that the buyer’s sales people have observed jealously and nervously, sometimes even jumping over to your company as a result. No matter what the emotional focus, the buyer cannot continue to stand by and watch its business challenged so effectively.  The price negotiated is not at all the critical factor in the emotional sale.  It is the elimination of pain that drives the buyer to action.

A personal story

I experienced just this phenomenon and profited by the added value in the transaction provided by an emotional public company buyer for my business.  The potential buyer was a hardware company, aware that margins were decreasing and that software companies, once considered mere vehicles to help sell hardware, were now becoming the central component in a sale, mostly because hardware was fast becoming a commodity as prices dropped.

My buyer-candidate had previously licensed our firm as a distributor, a value-added reseller for its hardware.  As we grew to capture 16% of the world market in our niche, we successfully migrated from the single platform of the buyer-candidate onto hardware from any of its competitors – including IBM, NCR, HP and others.  At the same time, the buyer-candidate realized that we had become its largest reseller.

In one of many meetings with the buyer’s CEO, I “accidentally” dropped the truthful fact that his hardware now accounted for only about a third of our hardware revenues, down from 100% several years earlier.  It did not take but moments for him to realize that his largest reseller was giving his company only a third of its business, that his revenues were declining and ours increasing dramatically.  Simple in-the-head math shocked him into the realization that, if he could increase our use of his equipment in more sales, that he could slow or stop the decline in his revenues and he could migrate into a more software-centric company, much more highly valued by Wall Street, which was punishing his company for its decline and coming obsolescence.

Negotiating with an emotional buyer

Sometimes, you as seller don’t know the buyer’s deadline or even the reason driving it to a quick closing and higher price. That’s the fun of finding the emotional buyer.

For us, the resulting negotiation was rather quick and very lucrative for our side.  It was the first time I had witnessed an emotional buyer and appreciated the difference between “strategic” and “emotional” immediately.  Ever since, I have been urging my subsequent company CEO’s and boards to perform an exercise at regular intervals to seek out and identify future strategic and – if possible – emotional buyers.  We’ll describe that exercise in an insight very soon.

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Posted in The liquidity event and beyond | 4 Comments

Everything you do adds or reduces company value

Each decision you make to commit resources – your money or your use of corporate or personal time – affects the future value of your business.

Minor decisions, such as replacing employees who have left the company or replacing equipment needing updating, are usually considered operational in nature, and unless the business is changing direction, not relevant to this test.  But each commitment of resources of any substantial size for acquisition of new products, talent, even new companies, changes the value of your enterprise perhaps to a great degree.

Should I make an acquisition to increase value?

Let’s analyze the effect of a potential acquisition upon the value of your company.  We assume that you intend to sell the enterprise at some point in the future.  Let’s list some of the many reasons your company might find to make an acquisition.  New products, new geographic territories, elimination of a competitor, increase in revenues, consolidation savings, new talent, new distribution channels, and more are good reasons for a start.

Odds that an acquisition will be a success

Given these possible goals in making a good acquisition, there is one overarching question that you should consider before making that decision to acquire a company.  Know first that statistically, 80% of all acquisitions do not meet the intended objectives of the acquirer, making most all acquisitions risky.  The question to study in your board meeting long before making any offer to purchase a candidate business is: “Would this acquisition add significantly to our enterprise value  and attractiveness in an eventual sale?”

The alternative uses of your time and money

If the answer is “no” to the question above, and there are other opportunities for the use of cash that would add value, it would be wise to allocate resources to those opportunities.

[Email readers, continue here…]  Many companies find acquisitions to be a decision of “make or buy.” If the price of an acquisition is so high as to make the risk of creating the product or service yourself more attractive, that alternative must be discussed with your board. Remember to consider the cost of lost time if starting from scratch, and of patent or other branding considerations that would challenge a “make” decision.

After all, we are in business usually for the ultimate return we will someday receive from our investment.  If we are skillful in growing our business, the return from its sale will greatly exceed the total amount you will have earned from operations during the period of growth.

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Posted in Growth!, The liquidity event and beyond | Leave a comment

Can you profit by serving early adaptors?

I am a gadget freak, often purchasing new technologies in their first release.  And my closet is full of such gadgets, from early pen-based computers to early brick-sized cell phones to an electronic handwriting recognition pad received as a gift to test.  These early dives into new technologies serve a purpose for me. They keep me at the leading edge of new development as it is productized, even before mass production.  They allow me to preview new devices and technologies before release so that I might write about and speak about them in my “Tech Trends” keynotes.  And they are always the center of attention with my tech-savvy friends, some of whom are in the habit of asking, “So what’s new today” each time we meet.

Cost to the user and to the producer

The cost of such attention-seeking and research is relatively low for me, and certainly the reward of being sought out as a speaker addressing the trends in technology is enough in itself.

But I have been on the other side of the early adopter development process several times in the past, and can attest that it is great fun, but rarely profitable to be the first with any new product that requires simultaneously evangelizing or teaching the masses within the industry and marketing the new product offering.  The costs in playing such a dual role are many times that of those in positioning a new product in a niche already opened by another.  And statistically, the first product into a niche is very rarely the one to succeed.

Some great examples of second-to-market

Apple, for example, was nowhere near the first to introduce an MP3 handheld music player.  I had owned several before the first iPod was released.  Apple learned that their leverage was in the simultaneous creation of an easy-to-use retail music store for seamlessly downloading songs, podcasts and later applications to the device.  It did not hurt that Apple always seemed to trump the competition in design of the product and the product’s user interface too.

My “way too early” story

In 1986, while in the hotel technology business, I observed the back-room success of American Airlines with their new Sabre subsidiary and its creation of a “yield management” system to use massive data to project demand for an airline seat on an individual flight segment days and months into the future.  I was not alone among hotel industry executives curious for more information.  And Sabre was not talking to anyone about their magic potion.

[Email readers, continue here…] First Hyatt Hotels, then Marriott Corporation called me to their respective headquarters to consult with their executives on this subject under a non-disclosure with each.  I became even more excited about the concept applied to the hotel industry.  Both of those chains had very primitive modules in their respective reservation systems.  Marriott called theirs “tier pricing”.  If a future date was already booked at 80%, then they would eliminate any discounts below 10% from the “rack” or standard room rate.  At 90% they would stop discounting entirely.  These elementary steps were in the right direction but very primitive.

Seizing a too-early opportunity

So, I set about partnering with a small group of MIT graduates to produce specialized decision software for the hotel industry using the “LISP” programming language, created just for decision-making, allowing for coding inductive and deductive logic into the software.  I partnered with Texas Instruments, producer of a LISP computer, the TI Explorer.  We designed and produced special cards for the TI that would allow Apple Macintosh workstations to be used, with their handsome graphic user interface.

Then I designed what was then a ground-breaking new software system that could analyze tons of data from past guest stays on the same date a year earlier and other dates with the same day of week, add factoring for city-wide events on any future date such as pro football games and conventions, analyze the speed of increase in any night’s future reservations, and much more.

How it worked

Each night, the system was designed to perform its analysis using real advanced reservations data current to the moment and run the data through a series of rules I wrote which could be modified or added to by local hotel management, to automatically make pricing decisions and automatically implement them.  The system coordinated decisions between the reservations department which accepted individual or transient reservations and the group sales department booking groups at a discounted rate, allocating available rooms between each to achieve maximum revenue for any future date.

Our test sites

I found a willing test site in the Royal Sonesta Hotel in Cambridge, Massachusetts, whose management was thrilled to participate in an industry-changing experiment with new technology.  The system was priced at $150 thousand, but we calculated that the average decision implemented for the 300-room property should be worth $5 thousand, making payback within an amazing 60 days if all worked as planned.  Our company installed the system, integrated it with the Sonesta computer system which our company had previously provided, trained the staff, and began to measure the results after turning on the system in a live environment.  In the meantime, we sold a second system to a large timeshare resort in Orlando for the same price.  By agreement, Sonesta withheld payment until completion of the beta test period.

The real test: The industry trade show

The industry’s annual technology trade show came up during these tests.  The industry was abuzz about this “artificial intelligence” system and its purported early results, and I wrote the cover story for the industry magazine about the system, and organized a panel composed of executives from Sonesta, Marriott and other chains to present and discuss this newest industry marvel.  On the day and hour of the panel, it became obvious that the house was way overbooked.  We agreed to repeat the panel later that day for the hundreds of people unable to get into the large room.  We were a great success with a great, ground-breaking product.

Reality trounces early vision

And the next week we asked for payment from the test property, after sign-offs from all its managers but the top one.  The general manager was also an executive of the family chain of hotels.  He called me in, along with several of the second level managers so enthused about the system, and stated, “This is nice, but I could do this work on the back of a napkin,” shocking us all, and he refused the pay for the machine.  I challenged him immediately.

“Let’s disconnect the system from influencing the reservation system for one week,” I offered, “and let the machine calculate but not implement its decisions. During that week, you make your decisions each night on the back of your napkin.  At the end of the week, we’ll compare the effectiveness of each.  If you agree that our system was more likely to positively affect revenues on those dates targeted, you pay for the system.  If not, we’ll remove the test system and find another home for it.”

He agreed.  Management added a few new rules to the rule base and watched over the system each evening, anxious that there be no contest between this number-crunching wonder and a single manager’s intuitive guesses.

The moment of truth: Facing the “no decision” competition

A week later, I again traveled across the country to the property to meet with the same team and the general manager.  We printed out the week’s decisions, those not implemented.  We presented our findings.  And waited for the GM’s response.  “I did not bother,” he stated. “I have no doubt that I could have done this better if I’d taken the time; but I was busy this week.”

The final lesson: Too early to market is a fatal mistake

We could not argue with the money, even if we were right and all other managers desperately wanted to keep the wonder machine.  So, we removed the system.  After all that great press, I realized that the industry just was not ready for such a leap, giving up authority to a computer, even if at least one major airline had successfully done so.  I offered to repurchase the second machine from the hotel in Florida.  After all, what company can maintain such a small number of unique systems?

Our mundane, but profitable solution

I turned to Tom, our chief programmer, and directed him to use as many of the features of the knowledge based (artificial intelligence) system as possible, but to be reprogrammed into our standard reservations module using our BASIC programming language.  Tom’s team did just that, perhaps saving 70-80% of the functionality even if none of the leading-edge glitz.  We priced the reduced “feature” at $8,000 – and sold many over the years as mere add-ins to the reservation system.

After spending over a half million on the project (and receiving at least that in great publicity), I learned a lesson.  It is satisfying but rarely profitable to cater to early adopters.

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Posted in Finding your ideal niche, Positioning | 4 Comments