When poorly controlled, diabetes destroys blood vessels. As a doctor I saw many diabetic patients with gangrenous toes that needed amputation. The challenge for the surgeon is where to amputate.
If only the toes are amputated, the patient often returns with a gangrenous foot – and now the foot needs to go. Then this process continues, on up the leg, always one cut behind.
Although a tough discussion with the patient, often the best chance of “cure” is early and decisive action to amputate more than seems necessary.
As my company rapidly ran out of cash during the global financial crisis, memories of these patients returned to me.
I was always one cost cut behind where I needed to be, which inevitably necessitated another painful cut later. If only I’d cut earlier and more aggressively, the total cuts would likely have been smaller overall.
Growth not enough
Our company had revenue in the double-digit millions and just under 100 staff. We operated in a highly cyclical industry so always knew that an economic downturn would hurt.
The financial crisis taught everyone a lesson in just how quickly cash can deplete.
The company had always grown 50-100 per cent a year, with profits and cashflow sacrificed for growth. When sales first fell I confidently predicted they’d quickly recover; the salespeople just needed to work harder (this bit was true).
My smart and seasoned board members implored me to face reality and cut costs hard and fast. But I had a novice’s confidence.
As months passed by the crisis deepened.
Great clients didn’t renew, companies stopped spending, and our largest clients in Europe – huge banks – started going broke. The directors’ own businesses were being decimated by the crisis, and with increasing exasperation they demanded action from me in our business.
After much soul-searching, I eventually committed to redundancies of 10 per cent but still refused to accept the magnitude of our problems.
Such are the rose-coloured glasses of those crazy enough to found start-ups.
It was horrible to fire 10 staff into a dead jobs market, people I didn’t want to lose and who didn’t want to go. However I felt the bitter pill had now been swallowed and delivered a rousing speech to the remaining staff. It was a failure.
They all feared the global economic meltdown and saw further cuts as inevitable. It was an error in leadership and it severely damaged company culture.
Sales continued to suffer and the cash balance plummeted in sickening paroxysms as we headed towards bankruptcy.
We were still recording $500k a month in revenue and people were busy. But the business was scaled up for rapid growth and we couldn’t survive at these levels.
The degraded internal culture saw a dozen people depart over the next two months but it still wasn’t enough. So I cut another 30 people, and two months later another 20.
I then sold two of our three business units, and had to recapitalise the remaining one to keep it afloat. We were left with a single business unit containing perhaps 15 staff, and it was the first and only time any of my investors had lost money.
The recurring anxiety of failing those who had believed in me – both investors and staff – eventually left a permanent scar.
Cash is king
That baptism of fire taught me lessons that have dramatically shaped my view of start-ups.
Firstly: cash is all that matters. Cash buys time, no cash buys death.
The well-known technologist Steve Blank defined a start-up as “a temporary organisation designed to search for a repeatable and scalable business model”. The plain-speak advice this imparts to founders is, don’t run out of cash before you’ve invented a business.
That mistake is how the majority of start-ups die. In the conciliatory words of one of my senior executives who departed in those dark days: “Careers go on, but companies live and die”.
Employees must be treated with dignity and respect, but the primary job of a start-up CEO is to keep the company alive until it is self-sustainable.
Another key lesson was that all founders should have a decent grasp of accounting. It is my experience that a “forward cashflow projection” is understood by very few founders, and utilised by almost none.
That is like trying to race a formula one car without eyes.
I also learnt that the only reliable dollars are expenses; income is speculative. This second realisation reinforced my love of subscription businesses.
Above all else I learnt that founders must not delude themselves or others about cash.
In their hearts, founders know when things are going poorly. If there is a foreseeable cash crunch on the horizon then you just have to cut costs immediately to conserve cash. Then you have to honestly inform management and investors.
In the endless war of the start-up, cash is your ammunition. So don’t run out.
Read more: AFR