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Thursday, October 16, 2008

When Should A Start Up Reinvent Itself??

Deciding that it is time to start all over again is a very difficult decision for any company. For start ups it is extremely difficult because of the time, financial investment, emotion, momentum and ego invested in the business. The organization may actually be exhausted from working hard to get the initial model to work. Despite the heft and weight of this baggage founders, managers and investors have to periodically assess the viability of the business and determine if it makes sense to proceed on the current course.

This should not be mistaken for a call to shut a company down altogether. In fact, a prelude to a reassessment is to consider alternative ways to move forward leveraging the assets the company has built. These assets could be the customer base, technology/product, personnel, business relationships, etc.

I have been involved with two start up companies that engaged in a reassessment exercise, decided to reinvent the company and successfully made the adjustment.

My own company started out as an MIT spin off leveraging a project worked on during graduate study. After several years of converting the research into technology and a product our team decided that much more would have to done to make the product a big commercial success. During our initial phase we had established good relationships with a number of large commercial and government organizations. During our engagement with these organization we began to provide consulting on the introduction and deployment of service oriented CRM's. This proved to be more successful then our original product idea. We switched gears, sought new investment and established strategic partnerships with suppliers of service oriented CRM solutions. This strategy worked and eventually resulted in us selling the company to one of the strategic partners.

In a subsequent start up we started out building a desktop application that exploited infrared data transfer. We were successful in getting the software preloaded on all the major laptop computers. However, Microsoft decided they wanted this business and began to offer the same thing for free.

We quickly adjusted to the Microsoft move and completely changed the business model. We bought another company in the Palm Pilot (not a Microsoft product) synchronization space, completely shifted our attention to this product and leveraged our existing laptop manufacturer relationships to get the software preloaded on the laptops. This became a big success and eventually resulted in an IPO for the company.

Certainly these changes were not painless. People were let go or dislocated, new technology platforms had to be established and new organizational structures had to be created. However, everyone that was a stockholder in these companies came out on top.

So, how do you know that it is time for a change and you have to face the hard reality of reinventing your company?

The obvious sign is that the ROI in terms of time, energy and money is not forthcoming. If your organization is working really hard and investing an inordinate amount of time and energy into the operation with no obvious significant positive impact in terms of customers, revenue or business relationships then it is time to take a step back and seriously consider a makeover. This does not mean that you worked really hard for 6 months got no results and then you should shift gears. I am talking about a prolonged period of perhaps 2 or more years and a number of rounds of investment.

There are three general categories that should be evaluated to determine if restarting is the correct course of action. It could be that a restart is only required in one of these areas and the rest of the categories can be left unchanged. However, it is very unlikely that a breakdown in any one of these areas in not symptomatic of issues within the other categories.

Business: Is the business model working? This may seem like an obvious question but one that founders are reluctant to address. Admitting that things are not working according to plan is perceived as a weakness. You may be concerned about the investors finding out and not getting that next necessary round of funding. It could be that the model is not working but could work over a longer period of time and you want that time to figure it out.

You need to dig deep into the revenue operating expense ratio. What is your cash runway and can you realistically make it on the cash you have. Do you truly believe that the current model has legs in the existing business environment? What is happening at the current moment? How much effort have you put into making this work? What have you learned? Have other business models been considered given the experience you have had with this model? What is your customer feedback? What is your realistic growth rate? What is your retention rate or follow through with existing customers? Have new competitors come into the market and how are they doing? What has changed since you originally conceived of the idea to launch the company. How far off are you from a profitability plan?

Organization: What is going on with your organization? Do you have significant turnover either voluntary or involuntary? What is the morale of the group? Are departments fighting with each other? Are people recommending other business plans and products. Is every day a crisis?

Technology/Product: Does the product work? Are your customers happy with the product? Are they referring others to use the product service. Is the technology platform capable of handling the volume. Is it reliable? Are changes to the product being requested at a rapid rate to deal with declining customer adoption or struggling marketing programs? Are your developers motivated and engaged? Is the platform flexible enough to adopt to new customer programs and product enhancements?

If you are struggling in any of these areas you need to start considering alternatives. Look for the bright spots in the business. It is very seldom that everything is all bad. There are usually positive aspects to the business that can act as a foundation for the next step.

Customers: Do you have happy customers? You may have a segment of your customer base that is getting benefit from some part of your business. What specifically do they like about the product and service and can you characteristic this customer segment.

Product: If you have invested in a technology or a product can you get value from this in some other market or as a part of another product?

Partners: Are you working with companies that are using your product and would rather use it in another way or integrated into another product?

Talent and Ideas: Most companies have talent people in all levels of the organization. Tap these talented people for new ideas and concepts. You might be surprised at what they come up with.

In conclusion, you should start reinventing and suggesting alternatives before you run out of money or funding. Do not wait to the last minute to recognize that a change needs to be made. In most cases there are viable alternatives that can lead to a successful outcome. An orderly transition is always preferable to a last minute panic. The people in your organization are the best assets you have. You want to make sure you keep them to help create the new company and to transition our of the old one.

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