To Hang In or to Let Go? When to KILL your Startup

Horse dead

“When the horse is dead – dismount” is succinct practical advice sometimes attributed to the famous cavalry general Lord Mountbatten. No matter what its origin, the essence of it is clear: stop agonizing and procrastinating when something ends; the only thing left to do is to get off the horse and move on with your life.

The fact is, not every startup works out; in reality most of them fail. It is a fact of life supported by a mountain of stats data. And yet, it is extremely hard for most people to disentangle themselves from what usually was a significant personal emotional investment. The biggest hurdle to overcome here is what’s known as sunk cost fallacy. It usually goes like this: “We have invested so much (money – if you are financial investor, or life – if you are a founder), we worked so hard, we achieved so much, etc, etc that we cannot possibly let go.”

“If we could only get more funding or bring in better talent, we would succeed!” NO, you would NOT if you missed the market opportunity (assuming there ever was one), the customers are not buying, your team is burnt out and your investors look ready to kill you. Under these circumstances no amount of whip cracking will help; just get off the dead horse and move on to pursue better prospects in your life.

I have been recently involved with a startup whose story perfectly illustrates my points. The founders developed a business plan addressing an emerging market problem which, although initially nascent, appeared to be destined to become a major issue (and therefore a market opportunity) in about a year or so. Theirs was a chance to pioneer a new industry and get all the glory of it.

They managed to raise some modest angel funding that allowed them to toil for about a year initially, investing their sweat equity and some cash of their own to develop a product prototype. At this point they attracted a $2M seed investment from a Toronto-based VC fund.

The experienced founders executed well, built a strong development team and launched the first product before the year was over. Good product reviews arrived and a couple of early-adopter customer purchases materialized. The CEO was walking tall, receiving inquiries from top tier VCs such as Kleiner Perkins, Sequoia, NEA, etc. A substantial funding round appeared to be a sure thing. However, during the second year of operation sales were slow as the market was taking its time to develop. Consequently, venture capitalists were in no hurry to jump in and adopted a wait-and-see attitude.

With the high burn and dwindling funding prospects, the seed investors started to worry. I remember going to Board meetings and hearing remarks like: “We may have to do a reset”, “The only thing a VC can do is replace the CEO”, and such. Sure enough, the founder-CEO was asked to find her replacement and the expensive $60K headhunter-led search started.

When a company is still in the startup mode, searching for a winning business model, as opposed to being in the execution mode, replacing the CEO is rarely a good idea – unless, of course, the existing CEO is clearly incompetent. There is a major difference between a non-linear skillset of a founding CEO with his vision, passion, and commitment, and a hired-CEO with his usually linear execution skills. Such a change is a major and costly disruption in the life of a young startup. If nothing else, it takes about a full one-year business cycle for the new CEO to fully understand the realities of his business. In addition, with the departure of its CEO the company loses an enormous amount of the painfully accumulated company specific business experience.

With the new face put on the company, the VCs provided additional cash support by twisting some arms in financial circles to close a new investment round of $3.5M. With these resources in hand, the team embarked on the second-life journey. However, in spite of the new face, talents, cash and the energy, the market readiness has not changed. Fast-forward through a few heroic-effort but modest sales, high burn, etc and 3 years later the company is again running out of money.

At this point, everyone is exhausted and out of ideas for what to do next. The horse is dead but it is so hard to admit it! The sunk cost fallacy is raising its ugly head: we invested so much, right? It is so hard to admit a mistake and let go. Thus, the company is put in a dormant state: most employees laid off, the hired CEO stays part-time while pursuing other income opportunities, the original investors write it off mentally but still keep it on the books, the most recently sucked-in investor has no clue what to do so lets the ship drift, barely keeping the lights on for appearances just in case…

But wait, that’s still not the end of this story. After a year of this malaise, the original founder-CEO gets approached to see if he could step back in and see what could be done with the company. Another restructuring follows with $0.5M new funding to see what could be done. More heroic sales efforts come with some modest results but the market still isn’t there. Finally, all the key members of the crew quit to pursue better prospects in their lives but the controlling investor hires yet another expensive sweet talking miracle-maker who promises resurrection and the recovery of that sunken cost…

Technology startups are not mature proven-viability companies that could be “management engineered” and played with. They are essentially experiments in market or technology. Their founding premises and hypotheses need to be quickly tested and verified before large amounts of money are deployed. If the business model fails repeatedly, abandon ship no matter what the sunken cost is.

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Innovate, Adapt, or Die

Innovation“Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you lead them, and how much you get it.

This quotation from S. Jobs was floating through my mind as I perused the enjoyable read of the recently published “Adventures in Innovation: Inside the Rise and Fall of Nortel” by John Tyson. The book is a fascinating personal account by one of the key R&D executives who has been there for most of the ride since 1966 until 2001, almost the end. There are many facets to his story but at the heart of it is one of universal interest to anyone in the high-tech community: the eternal tension between creativity and innovation on one hand, and the need to maximize revenue and profits.

It does not matter whether you are a start-up or a billion dollar company. All for-profit organizations powered by innovation experience this built-in tension. There is nothing wrong with it, quite the opposite. Its existence is healthy and helps to right the ship as it sails through turbulent waters of the forever changing business seas – as long as it is constructive, kept in balance and supported by the trust and mutual respect of the members of the crew.

This tension, between, as Tyson calls it, “pinstriped executives driving sales and white-coated lab engineers pursuing ideas for products a decade away”, is not difficult to maintain in balance as long as both camps talk to each other and the top leadership listens. But it is easy to stop listening as sales grow through the roof, the stock price is exploding and you are in the midst of a wild binge of acquisitions and hiring waves.

Putting R&D spending under the control of the operating businesses focused on immediate products and profits carries a huge risk that research will become just another cost, rather than an investment in the future. In the battle between the operating, money-making arm of the organization and the R&D operation, the scales are tipped towards the former. At the end it will win this unless there is a strong structural protective cocoon around R&D and the enlightened top leadership which does not waiver. Arguably, Nortel collapsed because the conversation stopped  between the two camps.

In one of his recalled stories, Tyson asks Scrivener, Nortel’s CEO at the time, about managing business strategy and tactics. It is instructive, that as CEO he owned the strategy and the vision, and considered the operating and marketing plans to be tactical. Consequently he advised aspiring executives to learn to manage the strategy and delegate the tactics. Even more memorable, when asked for his planning horizon, he answered: “10 years.”

Now, this is truly mind-boggling stuff in today’s business environment when very few business leaders have the guts to think that way without quickly giving up to the pressures of short-term expediency. In terms of planning with 10 years horizons, well…, possibly, just possibly the Politburo of China might be able to afford it 🙂 And yet, one feels this inner itch, a tiny voice whispering that he was right and that’s the way to do it…

When a CEO loses it and falls prey to the short-term expediency rather than viewing R&D as long-term investment, that delicate tension balance will break-down and the internal fighting will start over marketing as an expense versus an investment. This leads to a waste of a lot of money, resources, and time. Ultimately, the collapse will be in sight.

Under these circumstances, there is only one more potential saviour: the enlightened, competent Board of Directors which takes seriously its fundamental responsibility to proactively set the strategic direction of the company. However, if the Board allows itself to become too remote from the corporate culture, shielded by executives who consider the directors a necessary evil, it will turn itself into ineffective caretakers as in Nortel’s case towards the end when “Board members were little more than well-meaning, part-time sophisticated  contractors who were well compensated to meet the minimal legal requirements.”

There are many valuable lessons from Nortel’s story – the biggest tragedy in Canadian high-tech – which are worth pondering to help other tech organizations, Blackberry and re-modeled NRC come to mind, avoid snatching defeat from the jaws of victory. After all, “Those who do not learn from history are doomed to repeat it.”

Startup Math for Techies

“Build a better mousetrap, and the world will beat a path to your door” is a saying derived from Ralph Waldo Emerson. Apparently many take this metaphor quite literally, with more than 4,400 patents issued by the US Patent Office for new mousetraps, with thousands of more unsuccessful applicants, making mousetraps the “most frequently invented device in U.S. history”.  However, you don’t want to be one of these inventors.

The assumption that technical wizardry is sufficient to build a successful business is a common psychological flaw among aspiring tech entrepreneurs. Thus to help you see the light through the fog, let me give you a brief tutorial using the language favoured by engineers – mathematical equations.

T ≠ B

Technology IS NOT a Business

Innovative technology is just a starting point and the skills and talent required for R&D do not always translate into product development know-how.

T+P  ≠ B

Technology and Product IS NOT a Business

Productization skills are essential in the new tech business. But even having an innovative product without a good market for it will not result in sales.

T+P+M  ≠ B

Technology and Product and Market IS NOT a Business

Arriving at a good market fit with an innovative product that customers are buying is an excellent place to be. But this by itself still does not make for a successful profitable business.

T+P+M+E  = B

Technology and Product and Market and Execution IS a Business

Like well-oiled machinery that performs reliably day in and out at a reasonable cost, making something useful for which there is a demand and what could be sold profitably – a well-run successful business pulls all these elements together in a harmonious whole, managed by an experienced team with complementary skills and talents.

So, there you have it! And if you are hungry for more complex math, here is another equation to ponder 🙂

VisionIntoAction Equation

Challenge: Please let me know in the Comments section below how you interpret this “equation”. I am happy to fund a dinner for further discussion with an author of the most interesting comment!

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