How (not?) to keep a small company afloat in tough times…

Nearly ten years ago I started a company in Australia with a group of like-minded innovative guys in pursuit of success and ultimately freedom.  We raised a bunch of VC money (over a million) and cranked out some super high-quality code.  We shipped several releases – on CD at the time – and captured about 10% of the market.  Then “dot com” hit.  We struggled.  We died.  However, it wasn’t that “dot com” killed us.  No.  We never blamed it.  It was our inability to think strategically in the market place and to keep delivering products that people highly valued and would ultimately hand over “their hard earned cash” for in tough times. While our product was good, we realized it wasn’t something that people “really needed” and it was something they could live without during such times. There were a lot of products in the market like this. Almost all of them died. Similar things are happening in the current global recession.

We prolonged our existence for a long time, longer than we expected.  It was painful, often very painful. Friendships and relationships were damaged.  Some completely destroyed.  But a lot of lessons where learnt. Some I’m proud of and some I’m not.  There were also some ideas that were simply stupid. I’m thankful we never implemented or attempted those. 

Here’s my top 18 things to do to survive in tough times.

1. Cut costs.   It’s all about being ruthless.  If you can’t quantify the contribution that something brings to the company, then it must go.  We cut back on a lot of things.  Company lunches, coffee, parking, all kinds of things.  We also reduced holidays, especially for ourselves (and thus holiday pay).  

2. Cut staff.  This is especially difficult in a small company when everyone knows everyone else – ie: it’s family, but this has to be done.  We cut staff.  Generally Last-In-First-Out.  I can still remember the first time I sacked someone – someone that was very good at their job and really didn’t deserve to go.  But we “let them go”.

3. Contract out existing staff.  If you can’t cut staff, perhaps they are better put to work doing something else to bring in cash.  It’s all about cashflow, so bringing in more is a good thing.  Both myself and a colleague started contracting for another company while running our own. Of course our VC “suggested” this and made it “very compelling”. By mere coincidence the “other company” was also being funded by the same VC, but it kept us going.  Working multiple high-pressure jobs ain’t easy though.

4. Work longer hours.  If you cut staff inevitably you still need to pick up some additional work.  We mainly worked 6 days a week and every night.  For me the day off involved sleeping – even when visiting friends and family I spent a lot of time crashed out on the couch. I’d avoid driving so I could sleep.  Ultimately we’d roaster people to work weekends etc.

5. Increase prices.  Seems weird but we found that after testing the market we could sell less but at a higher-price point.  Less customers meant less support (not that we had much).  We almost doubled our price.

6. Charge for support.  We didn’t do this, but when we looked at things it seemed more profitable to ship a slightly worse quality product, with more regular updates, then have a higher license. Ultimately we decided that we didn’t want to build a company based on a support model.  We had a great reputation for quality and customer service.  So this was never a real option.

7. Open source it.  We didn’t do this, but it followed on from our conversations about #6.  Perhaps we could possibly extract more money from support than actually selling the product.  In fact, giving it away, complete with the source was a viable option.  What we eventually did was increase the period people could use the product in “trails”. ie: to get them hooked, and then send them an invoice.  People seem to pay invoices when they arrived.  During the “trail” period everything was branded with “trail”.  For people to get rid of the “trial” they need to pay.  This is what I like to call the “pay us to take the pain away” model.

8. Don’t pay suppliers (immediately).  Yup.  It’s a simple process and not something I personally liked doing.  We’d simply make sure we’d leave it to the last minute to pay suppliers.  As our VC helped us “understand”, we always stretched invoice payments to 90 days.  This way we could extend cash flow and effectively use our suppliers as short-term creditors.  It destroys supplier relationships pretty quickly, but can give you room to breath – or mean you can meet the next months salary payments.

9. Avoid paying suppliers full value or a previously negotiated value.  Another VC “inspired” cash flow management technique.  Call up suppliers and negotiate after the invoice has been received or when a payment is due.  Again, not something any of us would like to do, but still, something that extended cash flow.  eg: We’d say, instead of paying $30k for some service, we’ll pay $15k, or installments of $2k for 10 months.  Again it was all about cash flow and ultimately paying staff salaries.

10. Selling the IP. Much harder to do than we thought, but licensing our IP to another company seemed like a good idea at the time.  The challenge was however finding a buyer.

11. Selling the company.  Following on from #10, trying to package ourselves up as a going concern.We’d market the crap out of ourselves, get as many “hits” as possible, ensure we were #1 on all search engines and then show a potential buyer how good we were.  Again, the challenge was finding a buyer that believed this.  Obviously it doesn’t work… even today.

12. Selling parts of the company.  Much like #11, but instead attempting to find another VC to help out.  Of course, the next round meant you’d be “taken to the cleaners” on valuation and end up owning less and less of the company you founded.  We looked at it and said, no chance.  We’d end up with 1%.

13. Getting a line of credit.  If #12 fails, often a line of credit is provided as an alternative.  This is a high risk approach and usually a “last ditch effort”.  Essentially it means that the creditors become first in line to seize assets should you not meet a repayment.  The big challenge here was finding an asset that a creditor would accept as collateral.  Most creditors wanted our houses.

14. Reduce salaries. Not something that’s easy to do, but it can help out.  We reduced our salaries, and some months did not take any payment.

15. Forget about bonuses.  Pretty obviously really.  No cash bonuses.  Do anything else to reward and provide recognition, accept use cash. We actually didn’t give bonuses anyway, so unfortunately it wasn’t an option.

16. Loan the company money.  Yup.  We became creditors of the company, but at the bottom of the stack. I personally borrowed money to pay company salaries, while at the same time not taking a salary.  The founders too turns doing this for months.

17. Find someone to sue.  Yup.  This had crossed our minds, but we didn’t do it.  Ultimately this is a game of chance.  What is the chance that we could sue someone and win?  We had earlier discovered someone cracking and on selling our licenses overseas.  We simply had to consider, “was there greater reward in investing our time and resources in suing them and being paid” rather than building a great company?  Our answer was no. Of course in the past few years we’ve seen this model in the industry a few times. Companies can get desperate when sales are dwindling and they look for someone to sue, for any reason. It’s a game of chance.  Anyone can be sued.  Previous customers, competitors.  Anyone, for any reason. Perhaps they’ll want to avoid court, and simply pay up.  ie: it generates cash flow.

18. Under no circumstances tell the public how bad things are. Yup.  We carried a brave face for a long time.  In front of our staff, family, friends and partners.  It wasn’t easy, but we did.  Something I’m not proud of, but we lived the “success lie” for many months.

Ultimately for me one day I just woke up, looked in the mirror and was honest with myself.  I asked the question “Are we trading insolvent?”.  Why did this bother me?  Simple really.  Knowingly trading insolvent is a “go to jail” offense in Australia.  Another way to think of it is “am I flogging a dead horse”.

Importantly I also learnt it’s not a question you should generally table in a board meeting.  Wow… was that an interesting meeting.  But after my lawyers helped out, things calmed down.  A few months later, the company was wound up, people were paid what ever could be salvaged and we went our separate ways.

While the company failed, these lessons kept us alive for longer than imagined. It’s clear that these approaches are now being used in the current crisis.

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