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.