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These Five 'Cs' Might Save Your A__

Winter is on its way-- something we're more than familiar with in Chicago-- but I'm not just talking about the weather. It's becoming frostier and frostier for startups caught in the lukewarm limbo between ideas and invoices to get their early backers to up their bets, especially when it's not clear that they've found a viable business model and/or a way to stop the bleeding sooner rather than later. 

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. (See You Can Pivot But You Should Never Twirl.) 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 unicorpses 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 the two things that some early investors and every VC understands are sunk costs and opportunity costs. 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 who are still sitting at the table (more likely associates now 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've got 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 to the table to help set the price and get the next round started. Flat valuations in times like this are the new "up" rounds and there are down rounds galore. (See Tech Startups Take the Money and Build.)

This is a Plan B world at best and the down-and-dirty talk on the limo ride to LaGuardia airport almost always includes whether to also shoot the CEO while they're 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 concessions. The last C is closing the doors and that's not a sight that anyone wants to see. So see 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 represents the best prospect of a long-term, sustainable competitive advantage for your business. And forget everything else. Don't apologize, don't try to explain, just buckle down and get the job done. The recent launch of UberEats in Chicago (as an "instant" meal delivery service) and its almost immediate abandonment of that commitment is a good example of knowing when to hold 'em and when to fold 'em--although not necessarily when to start 'em. It doesn't take a genius to figure out that it's pretty stupid to open the umpteenth home meal delivery service in Grub Hub's hometown.

Businesses that scale too soon, and which 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 too far between. It's critical to nail it before you scale it and, 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 kill list. NYC isn't a city, it's 5 or 6 different marketplaces all mashed together with a million people just waiting to eat your lunch. Your business expansion needs to be driven by actual demand, feasibility and real opportunities--not by some investor's fantasies and/or by fables about life in the Big Apple foisted on the public by the media and promoted by people barely making it in Brooklyn.

3. Combination

Take a careful look around and see who else in your space (or adjacent to it) is doing things right and see what the prospects of some kind of combination may be-- especially if your market itself continues to become more cluttered and competitive. We hear constantly that the shared/surplus economy or the "Now" economy continues to grow, fueled by millions of millennials holding multiple jobs. But tracking the gig economy isn't quite that easy. While the number of multiple job holders has in fact grown dramatically, their share of total employment has been flat or down over the last decade. No one knows for sure what the new world of work will look like in a few years.

We had a great example of a timely and smart combination recently in Chicago where Shiftgig and BookedOut got together and decided there were all kinds of economies and opportunities in a merger as well as the sheer relief in knowing that they could stop trying to beat each other's brains out. They are both players in the increasingly-crowded space that the Commerce Department is trying to define as "digital matching firms." Shiftgig was bigger and better established, but BookedOut had a lot of momentum and was gaining important traction in the experiential marketing sector. Now, instead of spending time building duplicative back ends and other redundant systems and offerings, they 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 their investors want to hear.

It's not easy in any market to attract the technical talent, the motivated sales people, 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. 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 to combine 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.

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 you look 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. (See No One Wins a Race to the Bottom.)

Here's the bottom line: 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.


About the Author

Howard A. Tullman, CEO, 1871

Howard Tullman has over 45 years of start-up, management, IPO and turn-around experience and an extensive operations background in web development, online services, large-scale information assembly and delivery systems, database design and implementation and the development, creation and production of all types and formats of multimedia, computer games and audio/video digital content. He has designed and developed GUI and natural user interfaces, interactive and immersive games and instruction systems and other electronic entertainments, training products and services, as well as other information-based products and services in a variety of fields including automotive, insurance, CRM, employment, real estate, consumer goods and social media.

Topics: Insights

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