Monday, August 05, 2019

New INC Magazine Blog Post by Kaplan Institute Exec Director Howard Tullman

Never Mind Plan B. You'd Better Get This Plan C Ready.
Investors are getting fidgety as the economy shows signs of slowing. They're going to get very picky with their follow-on funding choices. What are you going to do if they don't choose you?

It's getting more difficult every day for startups caught in the lukewarm limbo between ideas and invoices to get their early backers to follow on and up their bets with subsequent investments--even at flat valuations. For a bunch of desperate businesses, flat is gonna be the new up, especially when it's not clear that the earnest entrepreneur has found a viable business model and/or a way to stop the bleeding sooner rather than later.

Investors aren't patient people, especially when traditional markets are booming. Too many pivots with too little to show for the dollars down the drain and pretty soon no one wants to hear your "someday soon" story or your next grand plan. And if you're not even breaking even, no bank will look twice at your business or your balance sheet. This change isn't restricted to the dearly departed debacles in the Valley; it's going on in every village where waves of wishful thinkers are starting to wonder what hit them.

My sense is that the smart investor conversations taking place today aren't very often about the company going for the gold or about the current investors doubling down so some startup can shoot for the stars. These increasingly cranky chats are less about excitement and enthusiasm and much more about ennui and possible exits. Because sunk costs and opportunity costs are two things that some early investors and every VC understands.

While the entrepreneur is sweating survival, the investors are trying to decide whether their incremental dollars would be better spent on a new deal elsewhere. These are the days when the easy money gets hard. Those great gluten-free sugar cookies from the hip new bakery down the block that just shut its doors are tasting more like ashes in their mouths and they're asking themselves how they ended up sitting in a room with no doors feeling like some sucker after the circus left town.

The unhappy folks still sitting at the table (more likely associates now rather than the partners who got the ball rolling) aren't talking about how much more money they can put to work; they're trying to figure out how little additional cash they need to put up in order to preserve what's left of their position.  Everyone is telling you that they're really not inclined to do much of anything at all if you can't drag some new money from outside players to the table to help set the price and get the next round started. Feels a little bit like a search for the greater fool-- and even if they find someone, it's likely to be a down round.

This is a Plan B world at best and the down-and-dirty talk on the limo ride to LaGuardia almost always includes whether to shoot the CEO while in the process of trying to clean things up and save a little face. So, if you're the one on the bubble, forget Plan B, and get started on what I call Plan C.  You need to get a head start on talking about the tough choices and critical changes that need to be made. It's about figuring out what immediate actions you can take that will make a difference before they turn the lights out. You can have results or excuses, not both. Focus on facts rather than futures if you want to be around when things turn around. And forget about playing the blame game -- no one cares.

 Plan C is all about choices: contraction, consolidation, combination, conversion, and concession. The last C is closing the doors, and that's not a sight that anyone wants to see. So, move quickly and determine which of the C's makes the most sense for your startup.

1. Contraction
Suck it up and admit it. You can't be all things to all people, and no one ever has been. Focus on what sets you apart and what represents the best prospect of a long-term, sustainable competitive advantage for your business. Forget everything else. Don't apologize, don't try to explain; just buckle down and get the job done.

Businesses that scale too soon and that are a mile wide and an inch deep are doomed for many reasons, but the clearest and most telling is that they can't cost-effectively engage with, support, or connect to their customers because the customers are simply too few and far between. It's critical to nail it before you scale it; if you're grossly over-extended, your business is going nowhere.

2. Consolidation
Shut down the stupid San Francisco office sooner rather than later. You had no business being there in the first place and the fact that you're doing no business there ought to speak for itself.  San Francisco may be the most overheated and least representative market in America. Everyone there drinks the Kool-Aid for about 10 minutes and then moves on. Building a new business there is as slippery and unstable as trying to nail Jell-O to a tree.

New York should be next on the list. NYC isn't a city--it's 5 or 6 different marketplaces mashed together, with a million people waiting to eat your lunch just for fun. Your business expansion needs to be driven by actual demand, feasibility and real opportunities, not by some investor's fantasies and/or fables about life in the Big Apple foisted on the public by the media and by people barely making it in Brooklyn.

Amazon's closing their direct China operation after 20 years of effort to achieve about 1% of the market is a great recent example, although Jeff B clearly hangs on to things a lot longer than most mortals. Could it be the unending pot of money, rather than logic that enables such perseverance?

3. Combination
Take a careful look around and see who else is in your space or adjacent to it. Who else is doing things right? Calculate what the prospects of some kind of combination may be, especially if your market itself continues to be more cluttered and competitive. Pull off the right kind of combo and you can bring a single story to the market in a cleaner, more efficient and less costly way. This is exactly the kind of story that investors want to hear.

It's not easy in any market to attract the technical talent, the motivated salespeople, and the operations folks that you need to grow quickly. A well-planned and thoughtfully executed combination can demonstrably accelerate the process. You need to be careful to make sure that the companies' visions are aligned and that the problems they're addressing are similar and that the cultures of the businesses (and the leaders in particular) aren't in conflict. We've started to see more and more of these combos lately Cheddar being bought by Altice USA and Quartz's purchase by Uzabase are just a couple of deals where the metrics look okay, but the jury on the success of the marriage is still out.

These things aren't made or broken in the board room when the papers are signed; they rise or fail in the implementation and the execution. But in today's world, it's often a lot better and smarter than trying to go it alone.

4. Conversion
Sell some of your stuff to someone else. You may be great at lead generation and lousy at closing the sale once those prospects show up at your door. Or you may be a great sales organization that sucks at fulfillment and customer service. 

When you look at your skill sets and your customers, users, clients, etc. through a different lens --looking at them as potential assets to be converted or sold to some other enterprise-- it helps you see more clearly exactly what kind of business you're building. It may make the most sense to look at your company as a conduit or an intermediary and not as a one-stop shop trying to meet all the needs of the marketplace. You've got to play to your strengths and build on those if you're planning to stick around. Not every business gets to be the front door these days.

Twitter's acquisition of Highly is a good case in point of a fold-in purchase.   It made a quick buy rather than spend time building an attractive add-on piece of tech--the ability to highlight content and then share it. And you can bet that the Highly guys were constantly looking over their shoulders wondering if they were gonna see some cash from one of the giants or simply get crushed by them. The smartest players always think about managing their capital intake so they can be building their businesses to be bought when the time is right. 

5. Concessions
Maybe your pricing made sense in some early fever dream where you were the best and only player in the space. But now there are fast followers and clones everywhere and their offerings (at least on the surface) look a lot like yours. Once your customers start talking about price, you're on a very slippery slope.

Netflix went the opposite direction with very disappointing results. Instead of stealing a page from Amazon and lowering prices to make the inbound competitors even more miserable, they raised them and, for the first time, saw a decrease in users in the U.S. The market promptly punished the company for shedding customers. You never want to take your customers for granted or believe that they can't leave. You need to earn them every day.

Here's the bottom line. In the long run, you can't save your way to success and it's no fun to fire your friends or postpone your pet projects. But if you don't survive during the difficult times, you and your business won't be around to savor any success down the road. Do what needs to be done and do it now.

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