Trouble Ahead... (15.390, Wednesday, Week 13)
new-enterprisesyear-twoWhen things go wrong...
Product problems lead to PR/Marketing problems lead to Sales problems lead to Cashflow problems lead to HR problems.
Aim to catch problems early and get out of them. But how??
Problem #1: Missed sales targets
=> No one hits sales targets. 75% of VC-backed firms miss their initial sales targets in dramatic ways.
You need three sales plans:
Official plan --- 100%
Sales budget --- 115%
Operating plan --- 80-85%
=> Decision: Is this a permanent problem OR a temporary problem?
And so, do we: Change the plan OR keep on pushing.
If it's permanent, get to break-even. Cut expenses, cut salaries, cut people, reduce need for capital, steady the ship and then reassess. No one will ever tell you to do this. Angels won't tell you to fire people (too nice); VCs won't really tell you to fire people. You won't be popular.
Dave Duffield (PeopleSoft founder) gave $200M to dog and cat shelters after his first liquidity event. He said that when he came home, his dog was always happy to see him. Nobody else was happy to see him, but...
Problem #2: Product doesn't work, or it's late, or it's wrong.
=> Most products are late, and there is always pressure to ship buggy.
=> Decision: Is this the right product or the wrong one?
The real danger = "I'm making the wrong product, but I'm making it really well."
Rarely obvious; usually begins as a suspicion.
Example: IBM spent billions building awesome automated factories to build dot-matrix printers.
If it's the right product, take steps to avoid shipping something buggy. Appoint a quality czar who won't be bullied. If pressed, cut features.
"The engineers will bitch, because features have replaced sex and fast driving in their lives." -- Howard Anderson
How do you manage the pressure of a late product?
"Drinking. I always find that drinking works." -- Howard Anderson
Problem #3: Key employee leaves
=> Damage control.
What to say:
(1) Promise me that if this job doesn't work out, I'll be the first call you make.
[I might not hire you back, but...]
(2) Promise me that you'll give me a call if you need a recommendation.
[I might not give you one]
(3) Promise me that you won't poach the rest of my team, because I really need them.
Get an immediate commitment on the last one.
Send a follow-up with a letter (it can be nice and warm and fuzzy) confirming that the former employee won't poach.
Problem #4: Running out of cash
=> Obviously, get to break-even (see above).
-- Cut burn rate. If you're not shipping yet, cut sales guys. Cut sales before engineering and production, cut staff before line.
-- Raise money. Never stop raising money.
-- Tell your board early.
-- Meet with employees regularly.
-- Stretch payables, etc.
Big one: Tell your lead investor 90 days before you will run out of money. They will not take it nearly as badly as you are taking it.
"Remember: if you're a VC, five out of six of your companies are almost out of money. It's like running a cancer ward! Every once in a while someone climbs out of bed and runs the Boston Marathon, but..." -- Howard Anderson