For startup CEOs, tough economic periods are like stressful stretches in a marriage: They test your mettle while making ugly truths impossible to hide. And these days, amid industry-wide belt-tightening, “down rounds” and a still-moribund (though hopefully improving) IPO market, many venture-backed CEOs are baring it all — or should be — to their board members.
But just how should you, exactly, communicate with your investors when navigating a rough patch? I’m not talking about minor problems, like losing an employee or hitting 90 percent of your revenue plan. I’m talking about big issues, or even life-threatening situations: You’re down to six months’ worth of cash and verging on crisis.
In my experiences as a VC, I come down hard on the side of openness and transparency. Admittedly, being transparent is easy for me and tougher on my CEOs. After all, I’m not the one girding up for a difficult meeting that could make me look bad. But, as I’ve noted, it’s easier to get divorced than rid yourself of a VC investor, who should be your steadfast, long-term partner on this journey. Transparency with your investors builds trust, which facilitates sharing good advice and maximizing options. Lack of trust shuts down all those avenues. Openness with your VCs is not only the “right” strategy, it’s the smartest one. Here is some tactical advice.
Perception versus reality
First, I believe all CEOs need to be conscious of managing to reality, and not perception. You might be tempted to hide bad news from your board initially, or at least minimize it; if you’ve been media-trained, you know you’re supposed to stay positive and publicly “on message.”
That’s fine, except your investors are not “the public,” or reporters. They’re insiders, and they also often have a lot of experience about how to navigate tricky business situations. They also respect CEOs who admit mistakes, don’t sugar-coat problems and are willing to take calculated risks to improve their businesses. In other words, they respect leaders who are not worried about how big and possibly controversial business moves will be perceived by outsiders.
I work with one software CEO who I’d call a two-time offender of doing the right thing in this regard. Twice in our relationship he’s made proactive, difficult decisions that caused short-term pain for his company and could have led to bad press. But the moves resulted in long-term value for him and investors.
Fold up the ping pong tables and turn off the craft beer on tap — you’ve got serious work to do.
His first decision, made several years ago, was executing a substantial pivot away from an initial business model as an advertising network. Despite the business generating about $20 million of revenue, he concluded it was not creating durable value, so he shut down that business and took the company’s revenue to zero. He then spent the next few years re-building his product and selling it via a SaaS (software-as-a-service) model. Fast-forward to today, and he now has a rapidly growing SaaS business that is far bigger (and much more valuable) that his initial ad network. Shutting down the initial business and re-starting from scratch took guts, but it was the right long-term decision.
Tough decision No. 2 happened a couple of years later when this CEO essentially fired one-third of his SaaS customers because he wanted to migrate to larger enterprise accounts. His existing base of smaller customers simply wasn’t profitable. This stalled the company’s revenue for a year as it back-filled its sales pipeline with larger deals, but the company emerged with a much more stable (and profitable!) customer base.
Talk more, not less
This CEO also exemplified another piece of advice I give my CEOs: In bad times, you should own the problem, and then over-communicate when it comes to informing your board about it and exploring solutions.
In other words, don’t pass the buck. CEOs who don’t own their problems waste energy blaming other people — energy that should be funneled toward fixing their companies.
Once you’ve taken ownership, waste no time in bringing your board members into the conversation, and hold nothing back. At those early meetings held to discuss the problem, lay out the issues clearly, demonstrate you’ve studied them from all sides and present your straw-man recommendation. I call this a “straw man” because it may or may not be your ultimate move, but it’s your best idea right now. Stay open to changing your mind after talking with your board members; that’s the benefit such conversations can offer. You should speak to mentors and other CEOs you trust, as well.
Acting early, and being open-minded, almost always expands your choices.
Depending on the severity of the issue, you may also want to set up weekly calls to keep your board abreast of the situation and solicit ongoing feedback. In one recent situation with a portfolio company, we had a standing call every week for roughly six months as the executives worked through a very tricky financing situation. This consistency was very helpful to both the CEO and the board as it kept everyone in sync, built trust and allowed us to successfully navigate the situation.
The next logical step is getting tactical. My advice for companies in trouble is to focus maniacally on one or two key business metrics that directly correlate to the health of the company. This might be driving website traffic, reducing customer churn, slashing expenses or simply getting to break-even by any means necessary. In this situation, having fun and cultivating a quirky company culture are no longer high priorities.
Fold up the ping pong tables and turn off the craft beer on tap — you’ve got serious work to do. You’ll be surprised at the clarity this new focus brings. In addition, your go-forward plan needs tactical milestones to prove it’s working. Report on those milestones regularly to your board. Solicit their advice, and come to meetings prepared with ideas if things aren’t working as planned.
My portfolio company HotelTonight was recently profiled in the press for successfully transitioning from a high-burn business into a fast-growing, profitable company. One of the key ingredients to this transition was CEO Sam Shank’s insistence that the team focus on two KPIs (key performance indicators) — increasing revenue and reducing expenses — according to a strict plan. This may sound like an obvious way for a company to improve its fortunes, but too many companies get distracted by other metrics. In this case, HotelTonight’s laser-like focus on these two KPIs made it virtually certain the company would move past its rough patch and set itself up for future success.
Maximize your options — and don’t get cornered
Finally, I counsel CEOs not to let bad news or tough times paint them into a corner, business-wise. Instead, focus on maximizing your options. I have seen some CEOs tolerate excessive burn rates for too long, then come to their VCs with an urgent need for a new investment round, or a “bridge” financing. The hard truth is that cash is not always available. One CEO I know put all his eggs into the basket of raising another venture round, even though he only had six weeks of cash left and the company had had viable interest from a potential acquirer a few months earlier. The round did not come together, and the company was forced to take a very dilutive and painful bridge financing.
To avoid this do-or-die situation, I advise entrepreneurs to maximize their options by running parallel plays. In the case above, had the CEO executed a dual-track process of pursuing the possible acquisition and keeping the bridge financing as a backup option, I think the outcome would have been far better for the company and the employees. Acting early, and being open-minded, almost always expands your choices, and means you won’t get stuck with your worst option.
Being an entrepreneur and/or startup CEO is, obviously, extremely hard. It is particularly hard when things are not going well. However, communicating early, often and openly with your board can increase the chances you’ll navigate the rough patches and build a company with lasting value.