Dec 052009

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Dr. Earl R. Smith II


I am sometimes asked by investors to ‘parachute’ into a company and give them a quick assessment of conditions and possibilities. Most of the time, the company has been under-performing. Frequently the money that the investors provided has been spent and they are facing the need for follow-on funding. The investors want to know if additional investment is prudent. Generally I am asked to opine on four options: 1) shut it down, 2) sell or merge the company, 3) overhaul the team and value proposition and re-launch, or 4) make an additional investment and stay the course. My first steps are to prioritize those options and present a quick summary of the strengths and weaknesses of each. I also focus on the threats and opportunities that will most likely present themselves.

I divide the assessment process into phases. The first phase is designed to surface early indicators that might either eliminate the need for further investigation or focus the effort along one or two of the options. Many times, the first phase can be completed within two to four weeks. A presentation of findings and recommendations can then be used by the investors to decide whether there is anything worth saving and to chart, at a high level, a strategy for moving forward. Occasionally the decision is to shut down the company. At others times it is to find another company to buy it. Less frequently, the way forward is to invest further funds. Most often the decision is made to sketch out an overhaul of the value proposition and management team in preparation for a re-launch. This latter option can require a short-term investment of cash to keep the doors open during the strategic review phase but may be the best way forward.

The approach is hierarchical. It seeks to eliminate options one at a time; starting with the first one. Sometimes things have gone so far down that the only option is to shut it down. If there is nothing worth saving or the cost of saving the company would be much higher than any expected return, there are few options. If the decision is made to close the doors, the assessment is over and the clean up begins.

Most assessments reveal value that is worth protecting. As a result, the work continues. During this second phase, I use a seven-item screen to search for ‘indicators’. These are conditions that, should they exist, generally mean that one or the other of the options is indicated.

Unwarranted Hubris: I know this might seem like a redundant title. Generally all hubris is seen as unwarranted. In fact, it is generally seen as a highly unattractive tendency in both individuals and companies. But there is some hubris that is worse than others; and that is a hubris that rests on having accomplished nothing at all. It is entirely pretense.

I remember a recent presentation at an angel investor conference. The presenting team was completely unaware that they were making fools of themselves. Investors would ask basic questions. The responses were always inadequate and poorly thought out. But the team soldiered on. Their mantra was “we are a bunch of smart guys and will figure that out when the need arises”. Of course, most of the audience was thinking “if you are so damn smart, why didn’t you realize that you would need to have effective answers to these basic questions ready?”

Another company was full of this ‘change the world as we know it’ crap. They saw themselves as missionaries converting the ignorant. I remember a presentation that they gave to potential follow-on investors. Their basic message was that their likely clients were behind the curve. (The company was still pre-revenue) They, the super-team, were on a mission to educate the masses and convert them to the new technology. When one of the potential investors pointed out that their ‘ignorant likely clients’ were running successful businesses that made profits and had solid balance sheets, the team responded that ‘such success is no indication of anything’. The same realization was reached by every member of the audience at that very moment. The presentation was over even if the presenters did not realize it.

Sometimes this form of hubris is fueled by initial success or apparent success. A good example was one company that that developed a very innovative solution to a hard problem. That success generated a hubris that was magnificent to behold; if your stomach was strong enough. The problem came, of course, when the founders felt that monetization of their ‘gift to the world’ was far beneath them. Having spent the investors’ money, they had proven how smart they were. They did manage to forget that the investors were in it for a return on their money. But then, as the CEO said, “investors are just money grubbers”.

Hubris is a company killer. Once it sets in, it is very hard to eradicate. No logical conversation will help to mitigate the tendency. The habits of the management team will continue to destroy opportunities and increase costs. The behavior goes to branding and establishes the reputation of the company in the minds of potential customers. Arrogance is insulting and hubris is the worst kind of arrogance.

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