Early in the morning yesterday I had a chance to catch up with a friend and entrepreneur who had started a company 2 years ago. I have known him and his cofounder for a year now and got an opportunity to learn about their business and employees very well. They are both very strong technical folks, and had raised a small seed round of funding from a few angels and a institutional investor.
Both the cofounders are among the nicest people I know. Patient, good humored and simple, they were both genuinely great bosses who attracted a cadre of folks who were loyal, intelligent and blue-collar in their attitude and expectations.
Yesterday was a more sober meeting though, since the business was not in the best of health. He was fighting the good fight, but it was very tough going. In the last 3 months, a very reputed institutional investor had pulled out of a verbal commitment to a term sheet, which caused the company to rethink their plans. Their bank balance was at about 10+ L (1,000,000) INR, salaries and gross burn (monthly expenses) were at 7 L INR (700,000) and net burn (after revenues) was at 2 L INR (200,000). Revenues was growing, and were at 5 L INR (500,000), but not as fast as they’d like.
The business was losing money month-on-month and they had about 5 months to survive. The part that bothered me the most was that he knew the numbers well, but did not take any action, because he ran the company from his heart. He had known about the situation for 3 months now and still had not taken any corrective measures.
That to me is one of the biggest mistakes most non-business (technical or developer) entrepreneurs make. They are not ruthless about their business, and tend to make all decisions from the heart and gut alone, not from the head. It was clear to me that he had to create a longer runway for his business. There are only 2 ways to survive. Make more revenue (increase sales) and lower expenses (reduce cost).
Most technical entrepreneurs estimate sales to pick up faster than it actually does. I understand their optimism, but its probably (not scientific, but my gut says so) the #1 cause of companies having to close down prematurely.
Most technical entrepreneurs also dont lower their expense fast enough. For a software company, 70+% of their expense, in the early to mid-stages, is payroll. I understand their reluctance to do so, given how tough it is to hire good talent for startups, but that would be my #2 cause of companies having to close down prematurely.
It was clear to me that he had to reduce his headcount, by 50% at least, to quickly get his business into the ICU and rapidly look for new sales opportunities to increase revenues. While the revenues were largely not in his control (given how finicky customers are), the expenses are within his control.
He had some very valid reasons (as I mentioned he is a very nice person) to not reduce headcount. A few folks in his team had just gotten married and a few had families to provide for.
I have been in this situation two times just in the past 3 years. At both times, revenues from a customer suddenly were in jeopardy and I had to take corrective action very quickly. The day we got to know about it, we had to let go of 4 folks in a very close knit team of 7 and the second time let go of 3 people in a smaller team of 6 people.
I had to be ruthless about the business since I wanted the company to survive. Without those cuts, the business would have folded and the folks would have been out of a job in 3-6 months anyway. I thought it would be more appropriate to be proactive.
I also had to be compassionate as a leader so I took great pains to call at least 50+ friends to find a position that paid better and was more stable for most of my colleagues. Everyone of them got a role that paid higher and was closer to their home. One of my colleagues was going to get married, so we made a few adjustments to his salary as well so he could get a better pay hike at his next job.
The 7 colleagues are still good friends, and although there might have been some ill-will towards my actions in the early days, I am confident that now they understand that I had to do what was required so the business could survive.
When the writing is on the wall as a business person, have a strong action bias.
There may be tons of reasons, which are all very valid and humane, for you not to take any painful measures. Your first commitment should be towards your people – so do what it takes to help them land on their feet someplace else, but take the necessary actions to ensure that your business will live to fight another day.
You owe it to your dream, your passion and your family to give your startup a fighting chance and keep it surviving as long as you can.
But ruthless as an entrepreneur, and compassionate as a leader.
Above all, always be a force of good.
(About the Author: Mukund help startups at the Microsoft Accelerator. He founded and sold BuzzGain, a leader in Do It Yourself PR, to Meltwater in January 2010. Before that he founded and sold 2 Silicon Valley startups in the Internet & Enterprise software markets. The post has been taken from his personal blog ).