Lesson #376: Know When to Cut Your Losses

 

As a founding entrepreneur, it is hard to not to always be “in love” with “your baby”.  You created something from nothing, you nurtured it along the way and you built something really great.  Until that point “your baby” stops growing, your profitability falls with increased competition and the roller coaster starts picking up speed in the wrong direction, with revenues going down, not up as before.  It is very easy to want to “stay the course” and hope for things to get better in the future.  Depending on the root cause of the fall, like a temporary decline in the economy, it very well could rebound.  But there are times when the root cause cannot be fixed, or worse yet, will continue to “snowball” in the wrong direction.  In those scenarios, you need to know when to pull the “ripcord” to save whatever value you have left before your business is worth zero.  This post will help you identify what to look for and how to get you and your shareholders a “soft landing” when things start to turn south.

A Case Study on Joe’s Bikes

Meet Joe’s Bikes, a fictional ecommerce seller of electronic bikes (“eBikes”).  They were one of the first movers to be marketing eBikes online, launching their website in 2018, and were experiencing meteoric growth in the first several years that followed, growing their revenues from $0 to $20MM by 2022. But soon after that point, they were seeing a lot more competition from other eBike sellers online, and the effectiveness of their Google advertising was getting a lot worse.  Their profits which had peaked at $2MM in 2022, had quickly fallen to $1MM in 2023 with the increased advertising costs to break through the clutter of additional competitors online.

But then Joe noticed something really strange start happening in 2024; he saw his cost per click starting to double in Google, which meant his cost of customer acquisition was going to double.  And he saw his number of clicks from Google starting to cut in half, largely due to the invent of artificial intelligence engines like ChatGPT (taking traffic away from Google) and Google itself redesigning their pages to give their own A.I. results more promotion at the top of the search results (at the expense of the traditional search links at the bottom of the page).  The doubling of the cost per click meant his profits were going to slowly head to $0 on his current level of revenues, and the halving of his traffic meant his revenues would most likely cut in half from $20MM to $10MM over the next year, which suggested huge losses were in his future.  It wasn’t yet visible in his financial statements in 2023, but he knew the storm was coming in his 2024 projections.

If this case study sounds familiar, it should, as most all ecommerce companies in most all product categories were living some form of the above during their own growth curves over the last couple years.  Now what do we do about it?

What Are Joe’s Options

Option 1:  Ride Out The Storm.  Joe could do nothing and simply “hope” for his advertising struggles to improve.  But unless there were new marketing channels for Joe to pursue (e.g., distribution of his eBikes through retailers like Dick’s Sporting Goods), his ad metrics may never improve if he only stayed focused on search advertising.  You should never make business decisions with the word “hope” involved, so this path does not make sense.

Option 2: Restructure His Business.  Maybe Joe is fine watching his revenues fall from $20MM to $10MM, as long as he could think of a way to cut his expenses so that projected losses could become a small profit to afford his lifestyle.  But we are talking about a lot of cuts here (around 70%) for Joe to hit his goal.  And that does not sound like a reasonable path forward either.

Option 3.  Sell The Business While You Still Can.   Yes, Joe could have sold a year earlier for $10MM (5x his $2MM in profits at the time).  But that is water under the bridge at this point, and he should not be chasing that number.  He still can sell today for $5MM (5x his $1MM in profits reported in the prior year that just closed).  Which would be $5MM more than the $0 he would get next year, if profits are truly on their way towards big losses.  Assuming Joe can move quickly to find a buyer and getting the deal to closing, this is the best path forward.  But the longer he takes to get to the finish line, the lower the odds this path will work, as the profits start to fall in the coming months’ financial reports.  Joe must move at light speed here.

What Will Joe Do?

If Joe is a sole owner, the path that Joe should pursue is a personal decision, based on his personal goals.  But if Joe has shareholders, he must protect their interests, and in this case, selling now before it is too late, will at least get his investors an exit at a reasonable valuation that would yield them a nice return on their investment.  He should take that “win”, which his investors would appreciate and be willing to back him again on his next venture.  Because if Joe doesn’t sell now, and let’s revenues and profits fall resulting in a terrible trend line, they will never be able to sell, and his investor will lose all their monies invested, and more importantly, their faith in Joe.

How to Create Leading Indicators For Your Business

Joe was fortunate that he set metrics for himself to predict the future health of his business.  Most entrepreneurs live in the present and simply track their success and make decisions based on historical results.  You need to figure out how you can predict where your business is heading, to learn the bad news that may be coming your way, before it actually hits your business, so you have time to respond and take the necessary actions ahead of time.  In Joe’s case, his leading indicator was clicks and cost per click from his Google campaign, which he could track in “real time”.  The minute he saw those heading in the wrong direction, he knew it was time to take action.  Remember, a buyer of your business is studying historical financials, which still looked good for this business.  Only Joe knew of the future storm that was coming his way.  You need to figure out which leading indicators will be the ones that will save your business from a looming storm, with time to sail to shelter while you still can.

Closing Thoughts

So, a couple closing thoughts here.  First, stop chasing historical peak valuations that may never be achieved again.  A "bird in the hand" is always worth more than waiting for "two in the bush" especially if you feel the business is heading in a downward direction.  And second, make sure you have leading indicators in place that will enable you to quickly pull your “ripcord” with enough time to get you a “soft landing”.  Otherwise, prepare to crash and burn, entirely wiping out your equity value and reputation with investors in the process.

For future posts, please follow me on Twitter at: @georgedeeb.

You Sold Your Business--What Happens Next?

Congratulations, you just sold your business! But don’t expect things to remain the same under the new ownership. Oftentimes, new owners have a different vision of what to do with your business to help achieve their needs, and they may have different ideas on how best to do certain things inside the organization, resulting in a ripple effect of chaos for the transitioning staff in its wake. This article will help you figure out what to expect after a change in control, so the expectations of you and your team are properly managed ahead of time.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #375: Why Having Co-CEOs is Usually a Bad Idea

 

Oftentimes, two co-founders think it is a good idea to share CEO responsibilities, as Co-CEOs.  The logic being they can separate their roles and responsibilities, with one person leading certain departments (e.g., sales and marketing) and the other person leading other departments like (e.g., technology and operations).  The reality is, this is a pretty bad idea.  The business should only have one leader at a time that can “lead the ship” and make sure everything is perfectly coordinated across the entire company.  This post will teach you the potential pitfalls of a Co-CEO strategy.

Lack of One Sole Vision/Control

Anytime you add additional people to a decision-making process, that is most certainly going to involve you making some sort of compromise, where you are not doing exactly what you would have done if you were a stand-alone CEO.  On minor points, it probably doesn’t matter.  But if it is important strategic level points you are compromising, you end up diluting your own personal instincts and convictions.  And it is those same instincts and convictions that are often the difference between good outcomes and average outcomes.  You never want to be in a position of “managing towards the happy middle-ground”. 

Lack of One Sole Voice With the Team 

When there are two leaders, and those people are not necessarily in 100% alignment on the vision, they may be saying conflicting things to the team, in terms of the directions they are providing to the staff. That can create a lot of confusion with the team members, as they are unclear on whose voice to listen to the most, as they are both Co-CEOs.  And worse, it makes it look like the Co-CEOs are not in alignment, and are not communicating well with each other, which has the team nervous that leadership at the top doesn’t know what they are doing. 

Lack of a Tie-Breaker

What happens when the two Co-CEOs cannot come to an agreement on a topic?  There is no one there to break the tie.  Which either creates a level of paralysis where no decision gets made and the work doesn’t get done at all.  Or, it requires one of the Co-CEOs to back down, and agree to the other Co-CEO (usually with the louder voice and personality winning).  And that can create resentment towards the other person who is constantly not getting their opinions listened to or acted upon.

Different Management Styles Could Cause Friction

No two people are exactly the same; what happens when there are philosophical level differences in management approach.  Let’s say one of the Co-CEOs is a “top down” strategic level thinker that likes to “see the big picture forest” and the other Co-CEO is a “bottoms up” execution level thinker that likes to “live in the trees”.  Those two styles are completely different ways to make decisions and can easily “ruffle the feathers” of the two Co-CEOs over time, forcing them to think and act in ways that is not their preference.

You Lose Control on Half of the Business

If you are the “Sales & Marketing” leading Co-CEO, that doesn’t mean you don’t have opinions on how “Techology & Operations” are being run by the other Co-CEO.  But by dividing up the responsibilities, you are basically handing off all decisions in those other departments to the other Co-CEO.  If you trust the other person to operate alone in their silo, that is fine.  But what happens when you have a fundamental disagreement on how those other departments are being operated?  You can communicate that to your Co-CEO to try and fix it, but it is ultimately up to them to make the desired changes you want, which they may or may not do.

Your Co-CEO Refuses to Stay “In Their Swim Lane”

Even though you may have divided up the management responsibilities with your Co-CEO, that doesn’t mean they will always stay in their “swim lane”.  CEOs that like to lead and control, typically have a really hard time giving up control to anyone else.  And when that “likes to control” Co-CEO, starts drifting into the “swim lane” of their other Co-CEO, having to have input on every decision in their departments, that will really piss off the Co-CEO.  At that point, you don’t really have a Co-CEO structure at all, with one person needing to control all decisions.  That will end up very badly.

Limits Your Exit Options

When it comes time to sell your business, the new buyer would prefer to have one CEO be their sole decision maker, with which to sit on their board and work with the investors.  Also, when you are ready to sell, your Co-CEO may not be ready to sell.  Now you are stuck owning and working in a business that you no longer want to be working in.  Or worse, your miss “your open window” to sell, and market conditions change by the time your Co-CEO is finally ready to sell, but now the window has closed and you can’t sell.  You never want to be in a situation when you can’t get an exit for your equity, handcuffed by a Co-CEO’s opinion, when you see an exit as the right path forward.

Closing Thoughts

Hopefully, you now have a better understanding of the challenges at hand when you are considering a Co-CEO setup for your business.  There are examples where Co-CEOs have worked together perfectly—think the Google founders (Sergey Brin and Larry Page).  But more often than not, it ends up not working out very well at all—think the Salesforce executives (Marc Benioff first with Keith Block and then with Bret Taylor).   So, if you are considering this Co-CEO path, buyer beware, as it is ripe with potential pitfalls and most likely will not end up working well for the Co-CEOs, the staff or your investors.

For future posts, please follow me on Twitter at: @georgedeeb.

 

 

[VIDEO] Why Product-Market Fit is Critical For Startup Success

 

I was recently interviewed by ASBN, an online "television network" serving the small business community, about the importance of identifying product-market fit for a startup's success.  This video will help you learn what that means, how you attain it and how to measure it over time.  I thought this video turned out great, and I wanted to share it with all of you to make sure your new product launches have the highest odds of long-term success. I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above.

Thanks again to Jim Fitzpatrick, Shyann Malone and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

When to Sell Your Business--Before It's Too Late

As a founding entrepreneur, it is hard not to always be "in love" with "your baby". You created something from nothing, you nurtured it along the way, and you built something really great. Until the point "your baby" stops growing, your profitability falls with increased competition, and the roller coaster starts picking up speed in the wrong direction, with revenues going down, not up as before.  It is very easy to want to "stay the course" and hope for things to get better in the future. Depending on the root cause of the fall, like a temporary decline in the economy, it very well could rebound. But, there are times when the root cause cannot be fixed, or worse yet, will continue to "snowball" in the wrong direction.  In those scenarios, you need to know when to pull the "ripcord" to save whatever value you have left before your business is worth zero. This post will help you identify what to look for and how to get you and your shareholders a "soft landing" when things start to turn south.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] The Four Pillars of Equity Distribution For Startups

I was recently interviewed by ASBN, an online "television network" serving the small business community, about how best to split-up the equity between cofounders of a startup.  This video will help you learn how to handle all the key drivers here, like if the cofounder is investing cash, if they are deferring salary, their role in the company and more.  I thought this video turned out great, and I wanted to share it with all of you to make sure all cofounders are being treated fairly upfront, so there are no debates about equity interests in the future. I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above.

Thanks again to Jim Fitzpatrick, Shyann Malone and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.