Iron Pillar

No one has ever said that being an entrepreneur was easy. What I love about entrepreneurs is that even when they know that the odds of success are stacked against them, they barrel ahead with their dreams. What I have also seen over my years of investing and working with entrepreneurs is that often the journey can take its toll, especially if things don’t go as planned. And by the way, even for the most successful startups, the journey is never “up and to the right”, with predictable, constant, positive milestones. There are hiccups, air pockets, forks and roller coasters along the way. I have written about the fact that some of my investee companies have gone from lofty valuations and line of sight to an IPO to complete collapse, while others have gone from the brink of being out of cash and missing payroll, to phenomenal success. That issue of perceived risk as a function of a company’s life cycle is the subject of another blog. However, I have come to the realization that there should be checkpoints along the road for a startup where entrepreneurs and teams need to do what I call a “contextual check-in” — a reality check of where the startup is compared with where they original thought the company might be and what the natural course of action ought to be going forward. This blog is really about that “gut check” and mid-stream introspection.

My journey as an investor over the past two decades has been an emotional roller coaster as well. My partners and I had to learn over time to not get emotionally attached to our investments. Unlike in real life (hopefully), where we love all our children equally, in the VC world, given finite bandwidth and the transactional, returns-driven nature of the business, all investee companies are definitely not created equal. In all honesty I have probably spent a lot more time on companies, on average, that ended up with negative or mediocre outcomes (trying to revive the dying) rather than focusing on ones that actually created (or will likely create) outsized returns. That was driven in large part due to the emotional connection with the entrepreneurs, and also with the unnatural optimism of a near-term potential turnaround of situations that were going sideways. The reality is that I am a portfolio manager and have to think of myself and act as one. Having said that, I have lately been thinking a lot about those entrepreneurs who, for a variety of reasons, decided to stick with their ventures, often for a decade or more but the startup eventually failed or is clearly headed in that direction. While I can get some respite from the fact that very few companies in my portfolio fall into that category, what about the entrepreneur/founders/teams who stuck with those failed ventures for a big chunk of their young productive lives. That is the risk of being an entrepreneur I suppose.

I have seen the struggles of those entrepreneurs take a toll on their health, on their personal relationships, their families and more. I have been on the receiving end of middle of the night calls from desperate founders, confused and not knowing where or who to turn to. In a geography like India, as a company begins to spiral downwards, liabilities pile up and everyone from vendors and employees to banks and government/regulatory agencies come after the founders (and often Directors) personally. I have known of situations where founders had to hire security personnel to protect themselves and their loved ones because of threats from business partners, employees or lenders. At the end of the day, management bears the burden of going through the process of insolvency if indeed it comes to that. I can just imagine the kind of pressure that these founders must feel on the home front, for example. Especially when they hear stories of companies that became Unicorns in 3–5 years from their founding, while they themselves have been slogging it out for 8–10 years or more, with nothing to show for it except the proverbial “character development”. Creating successful startups is hard and often a slog.

So, what is the answer. To be honest I cannot claim to know the answer as I have not been in the shoes of the entrepreneur struggling in the 10th, 11th or 12th year of their venture that, despite all the hard work, eventually fails. But having worked with entrepreneurs for some time, I know that they are the ultimate optimists — always feeling that the big inflection is right around the corner, right around the corner, right around the corner, not realizing that they have been turning the corner so many times, they are basically going in circles. Board members and investors don’t necessarily have the incentive to stop the entrepreneur and shut the company down as long as the founders and teams feel that they have a shot at turning the ship around. Investors are usually senior in the liquidation stack, so as long as investors feel there is a solid shot at recovering capital and perhaps making some money, why think about winding the company up. But I think it is the responsibility of the Board to do just that… be guides, realists who can tell it like it is to entrepreneurs. To understand when the tide has indeed shifted and it’s better to package the company and sell it to the highest bidder, or shut it down completely, rather than kicking the can down the street and keeping the venture going unnaturally, often times taking on additional liability, pushing out payables, deferring salaries etc. This is clearly a tough call, especially in light of what I started this piece with — that there are instances when companies at the brink of disaster can indeed turn into successes. But, there are cases when the writing is indeed on the wall, and it is the collective responsibility of teams and investors/Board members to be honest and self-aware to make that call. I am aware of a situation in particular where one investor has been telling others on the capitalization table that it’s time to package the IP and find a home for the company for some time. Instead the founders and some of the investors have been hopeful of “the deal” that will save the company. Investors and management have been collectively hoping for a positive outcome for over two years, all the while the liabilities have been piling up. Hope cannot be a plan, by the way.

My personal feeling and recommendation to all entrepreneurs is that they need to do a timely “check in” whether it is with the founding team, a life coach (which I recommend that every entrepreneur have, by the way) or a board member with whom they feel incredibly comfortable. Quarterly OKR’s (Objectives and Key Results) made famous by John Doerr are a wonderful mechanism to do that timely check-in. Additionally, if the entrepreneur is self-aware, he/she will know when things are not going well and when they are in over their heads. It will be clear that getting up in the morning and going to the office is increasingly a struggle and not a pleasant experience. That may also be an indication that it is time either to bring in someone else to run the company or start exploring a “plan B or C”. The opportunity cost is absolutely massive for those entrepreneurs who spend a decade or more with their ventures that eventually fail. The emotional toll of “what I could have been doing” or “how much money I might have made elsewhere” could haunt the individuals for a long time, unless they are emotionally strong, and have a stellar support structure of family and friends around them. It might be interesting to do a study of such entrepreneurial cohort. Dinner time conversations on the home front become increasingly difficult, especially if there isn’t a financial safety net for these entrepreneurs, and often they have growing families with young children.

Another possible framework could be what I call the “six month rule”. In my humble opinion, a startup should always have six months of cash on hand. If a company finds itself continuously short of cash, and struggling for a long time (12–18 months) to find cash, or being drip-fed capital, those are often clear indications that the future is likely to be uncertain and difficult. Pay attention to that scenario. The market is sending you a clear signal that it may be time to look at alternative scenarios. M&A, even if sub-optimal might be the right call at that time.

Bottom line: entrepreneurs clearly know the risks when they launch their ventures. But there definitely needs to be a mechanism whereby they conduct an in-stream sanity check with at least a quarterly cadence, especially as they get past the 4th or 5th years of their ventures. There is a fine line sometimes between optimism and pragmatism. Finding that line is crucial in the life of a young entrepreneur, ideally with the help of a set of investors and Board members who are real sounding boards to help make the right choices, even if those choices are not ideal.

About Mohanjit Jolly

Mohanjit Jolly

Partner at Iron Pillar bringing to the table more than 2 decades of investing and operation experience.