How do we create proper dialogues about what is going on with our companies and in our markets?
“First they ignore you, then they laugh at you, then they fight you, then you win.” — Mahatma Gandhi
If it only was so simple. Many trailblazers and visionaries have suffered and paid dearly for insights and important discoveries that have ultimately been critical to the development and survival of mankind. And it is crazy how old, dogmatic ideas can possess an enduring longevity and persistence far beyond any meaningful end date by which it would be blatantly obvious that the old dogmas are wrong.
Take “The International Flat Earth Society” (IFERS), which was set up by Samuel Shenton in 1956, in Dover, UK. As the Soviet Union was launching the first Sputnik satellites, Samuel Shenton responded with, “Would sailing around the Isle of Wight prove that it were spherical? It is just the same for those satellites.” In fact, the spherical earth idea was, like so many important things, brought to life by the ancient Greeks. It was Aristotle who, in 330 BC, provided the first empirical evidence that the earth is, indeed, spherical, and not flat. Nevertheless, for more than 2,000 years, the idea of the “Flat Earth” has stayed alive. The idea has clearly been waning over the last 500 years, but remained dominant for a surprising amount of time.
Philippe Semmelweis paid dearly for his finding that washing hands significantly decreased infant mortality among the newly born. He was a Hungarian physician that lived from 1818 to 1865. He discovered that “childbed fever,” a common and often fatal occurrence in obstetrical clinics of the time, would dramatically decrease with the use of hand disinfection. Despite indisputable statistical evidence that his method was working, he was vilified by the medical community. He could offer no acceptable explanation for why his method was working. He suffered a nervous breakdown in 1865 and was admitted to an asylum, where he died shortly after admission from an innocuous infection of his hand, after supposingly having been beaten by the guards.
“Why is it so hard for us to accept new ideas? Why is it so difficult to accept new ways of doing things? “
Often, it is a question of power, as in the case of poor Semmelsweis. The medical community was relentless in their ridicule of the idea without scientific proof, which was eventually delivered by Louis Pasteur. In the case of the Flat Earthers, there were surely religious forces at play for centuries that affected the definition of our cosmology. Again, a power play.
How do we apply some of these lessons, and learn to accept new paradigms in our daily work as investors, board members, and entrepreneurs? How do we create proper dialogues about what is going on with our companies and in our markets?
Entrepreneurs are notoriously optimistic, which, generally, they should be. Otherwise they would probably never survive or perform the gravity-defying moves that sometimes, after all, keep their companies going. However, there are times when you must face the music and either sell or shut down your business before circumstances render your company obsolete. Markets move quickly, sometimes much more quickly than we would like to believe. And it’s not only entrepreneurs who are guilty of a form of “Stockholm syndrome” — feeling beholden to negative externalities but unable to react correctly — so are boards. Individual board members are often loath to be the bad person, the negative one. There is a tendency among board members, especially in the current heady investment environment, of investors wanting to please management, to be “entrepreneur friendly.” Most investors know that their reputations are the subject of due diligence by entrepreneurs. They don’t want the reputation of being the grumpy old one, the negative one, the one asking the tough, difficult questions.
“Changing a mindset within the board of a company that, for some years, has been going well, but for one reason or another has started to splutter, is excruciatingly difficult.”
Changing that mindset is akin to joining the “International Flat Earth Society!” The thought that it will not succeed as a company just seems so far out. It was going well. What happened? The list of attempted remedies is long: Let us do an insider round. We think management has figured it out. Let’s pile on some venture debt. We fired the sales guy, so now everything is cool. Maybe we hire a new COO. Maybe we do all of these things. If none of these quite work, let’s make an acquisition to bolster our growth. And on it goes… I know that many of you have been through this kind of process, and it can take several years.
For an entrepreneur, it is devasting — a life’s work, or maybe 7–8–9 years’ work, out the door. How can I face my friends, family, collaborators, partners — all the people I have been making promises to? Most of my personal identity and self-worth is tied into the success (or lack thereof) of my company. There is NO way I am allowed to fail! Yes, that grit and determination, and the endless hours spent by entrepreneurs toiling away for their business, is what MAKES companies. But NOT facing reality is what BREAKS companies.
What can boards do? Generally, it is very difficult to co-opt management in an objective assessment of a business. Here are a few options:
- Talk to customers. The truth is always closest to the customer. Ask why they are buying. Ask what they think of the markets, of the competitors, of substitutes, pricing, and product competitiveness. If there is one, go sit in the call centre for a day. Listen to what customers are complaining about, what their problems are. (Great advice from Johannes Reck of GetYourGuide)
- Talk to competitors. This is not always easy, but competitors can be a better source of unvarnished information for boards than management. It is natural; as promoters of their own business, management is biased and emotionally deeply conflicted, making it difficult to obtain a dispassionate assessment of the company from them.
- Talk with analysts and industry observers. They don’t hold the final truth, but if they are competent, they will bring insights about the markets that you were not aware of.
- Look at what the numbers and business metrics tell you. They will not always tell you everything, but there are probably some things that do not quite look right. Or maybe there is a sneaking suspicion that the way the numbers are being reported does not bring the right view. Go sit with the CFO and talk through the numbers.
“If you start to have a sense or suspicion that things are not great, things are probably already deteriorating faster than you know. “
Course correcting a company that starts to misfire is a bit like shooting — you need to aim somewhere in the empty space where you think your target will be when the bullet has travelled the distance. In other words, for example, if you think you need to cut $1M of annual opex, you probably should cut $1.5M. If you are pursuing a dual track of fundraising and selling, and you believe you can sell the company for $25M, you may have to prepare everyone for accepting $5M. In my experience, companies in this situation are always far too optimistic, as are investors, about the exit potential. Unfortunately.
“First they ignore you, then they laugh at you, then they fight you, then you win.” — Mahatma Gandhi
Gandhi’s words do not always hold true for entrepreneurs, management, or investors. Nobody sets out to lose, but sometimes you must metaphorically join “The Flat Earth Society” to salvage what you have. That’s life.
