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Don’t be Lulled

How do you know your heart is about to be broken? Well, let me tell you.

I’ll start with a personal story. Imagine a young man in the prime of his teenage years, pimple faced, nerdy, and a romantic. Not a poet, mind you. Just a doe-eyed farm boy with a beat up Ford Pinto (yes, it actually did catch fire and explode!).

It’s a story you might have heard before. I dated, I fell in love, I was dumped. I said to [insert the harpy’s name here], “I thought things were going great (sob, sob, sob).” She replies, with incredulity, “Are you kidding?! This was coming for a while.”

Not a groundbreaking tale of woe but woe nonetheless. Here’s the same terrible tale in a different context: I built a product, I sold a lot of it, I failed. “I thought things were going fine.”

Oh the fools we do play.

[Tweet “But wait, we’re not fools. Well… we are entrepreneurs.”]

But this story isn’t just common. It is THE story of most startups. The reason some people call us fools is that the risk of failure is so incredibly high (actually, here in Colorado “incredibly high” might be the cause of some of these troubles).

So, if fools we aren’t, how did we not see this coming? In both the story of unrequited love and unrequited success there were certainly signs.

So, again, I ask, why didn’t we see them?

Sadly, we did. We just didn’t recognize them for what they were: signs of incremental failure.

It’s usually only in retrospect we see them. Suddenly, Betsy, I mean the company, isn’t just experiencing seemingly minor, disconnected events of less-than-greatness, the company is in a place in which its life is threatened.

And, don’t be lulled into a false sense of security.

[Tweet “Many failed ventures experienced great, sometimes incredible initial success.”]

This suggests a long and prosperous romantic future.

Alas, in the world of young love and young startups, past performance is not an indicator of future success. It merely suggests potential. In fact, most mid-to-late stage startups face a tremendous challenge as they experience the success they’ve been chasing.

In the midst of rapid growth they can’t successfully scale and must quickly redesign their organizations without disrupting their momentum or ongoing client operations, all the while generating sufficient cash flow to fund those efforts. You don’t want to learn that the hard way.

You want to be prepared for problems. The best way to do that is to pick up on the signs that things could or are starting to go south. You need to pick up on the signs earlier enough to do something about the underlying problems.

Leveraging my vast experience of pain and heartbreak, here are some the most common events/issues we often don’t recognize for what they are, signs of serious trouble:

  1. She starts dating someone else. Live and learn.

Just kidding. Here are the indicators:

  1. The terrible threes: three years old, $3.0m revenue, 30 employees. I have no idea why but those milestone are when I usually see the first signs of incremental failure.

Takeaway: When you get to those numbers, start looking closely at events or issues that seem minor to see if they suggest trends.

  1. Hiring to satisfy increasing client demands rather than to support new business. When your company grows, you need to hire people. Simple enough math. But, if you’re not adding new clients, and you’re not selling additional services to existing clients, your hiring needs shouldn’t significantly increase. If they do, you might be seeing operational issues that suggest you can’t scale.

Takeaway: If you can’t handle your current client demands, you can’t handle additional clients.

  1. You start interrupting workflow and redirecting people to take care of urgent client issues. Basically, you start fire drills. To be clear, fire drills happen on occasion just as a matter of course. It happens. But, if you find you’re increasingly having to stop people from their ongoing work stream, you’re likely facing operational issues that will limit your growth and will eventually kill your ability to deliver to existing clients. If you’re not growing, you’re going to contract.You’re creating some weird operational Ponzi scheme. You’re taking resources from satisfying a happy client in order to deal with a client that is already unhappy. Now you’ve got two unhappy clients. In order to deal with client number two, you start another fire drill and interrupt the service being provided to a third client. It snowballs and eventually you’re not satisfying any of your clients.

Takeaway: If you find you’re starting to interrupt workflow in order to take care of client fire drills, be concerned that your organization has operational issues that can limit your ability to retain and capture clients.

  1. Taking on any business just to cover short-term cash shortfalls. When you’re facing a cash crunch, you need to become more careful and more selective about new clients not less. But that’s the opposite of what most of us do. We scramble, we discount our services, we promise more than we should just to get some cash.Not only is that an indication that you have operational issues that will limit your growth, it absolutely puts significant downward pressure on your company. You basically force your company into failure.
    Note: Most startups can’t actually track cash flow per client, which means they’re not sure which clients are driving positive cash flow. Looking at only revenue and expenses is not enough. There is a lot of work being done for every client that’s not captured in financials but does consume cash.

Takeaways: 1) You don’t know which, if any, of your clients are supporting future growth rather than limiting it (i.e., generating positive, rather than negative cash flow).  2) You won’t know if you are pursuing or signing clients that will not generate positive cash flow and therefore will actually increase the speed of decline.

  1. Drama. Employees are the canary in the coal mine when it comes to signs of trouble. All organizations have some drama. Companies are filled with human beings with emotions and conflicting needs. That leads to tension and sometimes drama.But, if you see or sense an increase in the level of drama, especially from previously solid employees, be concerned, not just because drama kills momentum (speed of trust equals speed of business), also because it suggests your people are sensing things are moving in the wrong direction and struggling to deal with the related challenges. They might not be able to articulate those realities but realities they are.

Takeaway: Listen to your employees, not just what they’re saying but how they’re doing. They’re the first to feel constraints on your ability to service and take on clients, as well as issues related to the growing workforce and/or effective management.

And, just like with love, if your clients are starting to flirt with other vendors, you should probably pick up on the fact that things aren’t swell.

Just say’in.

Funny Thing Happened on the Way to the Forum

We all know that new business is driven by marketing, sales, differentiated products/services, etc. Those are components of all scalability efforts, of course.

But I’ve noticed that even before those are adjusted a startup that increases the strength and flexibility of its operations inexplicably attracts new business. It’s almost as if the firm’s increased capacity creates a vacuum that sucks in new revenue. If you see any of the issues above, you should consider taking a close look at whether you have operational issues rather than just sales or revenue issues.

[Tweet “For some reason when companies evolve their operations, they suddenly attract more business.”]

Notice that none of the five primary indicators touch upon declining revenue.

Don’t be lulled into thinking that previously increasing levels of revenue mean things are going great.

Don’t be the pimple-faced me.

The only thing sadder than a pimple-faced teenager sobbing on the hood of his soon-to-be-in-flames Pinto is an entrepreneur who had an excellent product and great initial success but whose startup failed even though it could have been saved if s/he paid closer attention to the signs of incremental failure.