The new office is in a class B building in San Francisco. Rent is through the roof. It’s an open floor plan; there are conference rooms around the side but the main area is open. Twenty desks are arranged throughout the front part of the office, with lots of room for expansion in the back. The desks are full, and there’s a beehive buzz of activity as you walk back to your desk.
In the six months since Joe and the engineering team came together to support Bill, three new engineers, a second product manager, a new director of sales, four sales development reps, and two account executives have come on board. There’s a new director of on-boarding, and he’s hired two launch specialists. You’re especially excited about your new director of marketing, Cheryl. With twenty-two customers live and five waiting to launch, you feel flush with excitement. By next month, revenue should be over $50,000 a month — more than $600,000 a year.
Chaos reigns. Sales materials have been hacked together by the reps themselves, and there is no message consistency. Cheryl’s onto it, but there’s a lot to do at once. Salesforce.com has been installed as the new CRM, but the SDRs and AEs aren’t using it yet. Without a sales process or even dealer lists to draw on, SDRs are randomly seeking out dealer websites online and calling cold, trying to talk anyone into a demo appointment. If they can’t reach the GM, they’ll talk with a manager or even an internet sales rep. It’s highly inefficient — in fact, it’s not working. Since the AEs don’t have any appointment flow to speak of from the SDRs, they’ve also begun to cold call. Or just hop in their cars and drive around to local dealers. Sales have been spotty, except for a couple of big wins. Over half your customers now come from just two multi-store groups — seven stores from Fieldstone Auto Group, and five from Dawson. The concentration makes you uneasy.
Integration issues and bugs keep popping up with the product. Your email server has been blacklisted by MSN.com — their bots tagged the email price quote responses as spam. You are working through the appeal process, and things are looking up — but in the meantime, you can’t get quotes out for leads from any dealer customer with an MSN.com email address. Dealers are lighting up the support number, which goes to the launch group, diverting the group’s attention from the five pending new dealer launches.
Between the new CRM system, the payroll system, the rent, the temp CFO, the twenty employees and the data services you must license to execute the price quote, burn has exploded to $300K a month. You have just two months of runway left. The good news is that your work on the A round is going well — or so you’ve told your board. You plan to raise $8M, and you’re hoping for a pre-money valuation of $10M or better.
Fess Fieldstone and Anik Kapoor, your two board members, are nervous. By now, they had expected you’d have a signed term sheet and be in final due diligence. Not so. “I think we’ll have one this week,” you say. “Python Ventures has met with me three times, and they’ve asked for our financials. They have a partner meeting Monday, and the guy I’ve been working with told me to expect a term sheet by end of day.”
. . .
Directional voice is the clarity with which a leader points the way forward. A CEO’s directional voice emerges first from the authority to exercise it. The board assigns responsibilities and delegates specific authority to a CEO. The boundaries of delegated authority are the first thing to clearly understand. Within a CEO’s authority boundaries, direction is set across multiple time horizons:
- Vision (distant future)
- Mission (future oriented)
- Strategic plan (usually an eighteen-month view)
- Strategic imperatives (focus is next six months)
- Top priorities (this month, this quarter)
- Today’s key decisions (this week, this month)
Early in a startup, the first four of these don’t really matter: nothing is known yet. Not really. Your product idea is a thesis — not yet proven. You have identified, but haven’t proven, a market. Even the combined capabilities of your team are a thesis. Starved for cash, you scramble daily to cheat annihilation. At this stage, money is everything. To get funded, you must first prove your idea, while validating the potential to attack a big market. This requires an opportunistic approach to direction setting. Research indicates that at the early stages of company building, successful entrepreneurs tend to act on five decision principles:¹
- Bring means: skills and money are needed to start anything
- Affordable loss: you only bet what you can afford to lose
- Make lemonade: you learn from every mistake or failure
- Seek co-creation partnerships: you find partners, whose interests will alter the design of your company
- Control vs. predict: you can predict nothing, so don’t try — control inputs and outputs vs. predicting
As traction is proven and a company scales, vision and mission clarify. Because infrastructure and competencies take time to build, a strategic plan becomes vital. Once the plan is clear, you must periodically call out strategic imperatives — every six months or so. This informs the top priority projects and actions you select each month to drive the strategic imperatives forward. In turn, these top priorities drive daily decision making.
How you set direction will impact its quality and the alignment it yields. While you are free (within your authority boundaries) to make your own decisions, significant decisions are best made with significant input. The advice of the board and your executive group, often informed by research and analysis, ensures both sharper decisions and better alignment. So too is active input from all other voices in the company — including individual contributor employees. It was a secretary at 3M that invented the Post-It note. At Google, individual contributor employees are involved in approving final product designs and the timing of product launches. In the setting of direction, open the door to all voices.
Leveraging the advice of the board, executives, and others, you must integrate input and think holistically so that your direction is internally consistent. It is easy to paper over disagreement in a way that yields internal inconsistencies — don’t do that. Change is multidimensional, so all things must be coordinated in an organically sound way. Think through sequencing, and the balance between immediate performance requirements and the building of new capability.
Vision, mission, strategic plan, and strategic imperatives are in the direction-setting domain. These decisions are existentially important; the future of your company rides on them. They must be made with great rigor, informed by research and the inputs of trusted advisors.
But once your decision has been made, you must act. Decisions, arrived at in the mind, must become actions, mobilized by voice. Directional voice creates alignment and followership. You bring along your board. You bring along your executive group. You bring along all employees, inspiring them to act.
Certainly, voice is not the only thing. There are tools for execution, such as OKRs (Objectives and Key Results), KPIs (Key Performance Indicators), financial plans, and project plans — all of these are important in ensuring that the direction you have set is successfully pursued.
But your voice is the most important thing.
. . .
Monday has passed, and Python Ventures has passed. The email was brief: “No term sheet. The automotive CRM space looks crowded. We’ve concluded that your price quote is just a feature, not a product. We can’t see it becoming a $100M+ business, so we’re out. Good luck.”Only four “bottom funnel” conversations remain. These are the VCs you’ve met more than once, and who have asked for backup documentation. You don’t have another meeting scheduled with any of them. You wonder — how can you move them towards a term sheet quickly, without seeming desperate?
Going online, you check your cash balance — and the wet sheen of fear emerges on your upper lip. You grab Joe and go into a conference room. As you open your laptop to show him the cash balance, your new head of sales, Ricki Donahue, comes bursting into the room. “Dawson Auto Group just canceled — that’s five stores,” she says. You gape at her. “Why? What happened?” you ask, eyes darkening. “Let me get this straight. Last month you sold just five stores. Now you’re telling me we’ve lost five stores. So we’re standing still,” you say. A flash of indignation clouds her face. “Maybe we need to fix the product. I’m hearing about more and more issues. I talked with Dawson’s VP that oversees the stores, and he told me his internet sales reps don’t like the quotes — they are disrupting their normal sales approach. Prices are getting to consumers before sales reps have had a chance to talk with them. That’s the idea, I know, but the reps don’t like it. And he ran the data — sales haven’t increased in their stores since starting up with us — they’ve actually gone down.”
As doom flirts at the outer edges of your mind, you steel yourself for the next right step. You arrange to meet your two board members at the Rosewood Hotel at 2 PM. When they arrive, you lay out the facts. No term sheet yet. We just received a big customer cancellation, and the four VCs still in the running for the A round need to be told. They won’t like it. The cash position has become precarious. Burn hovers at around $300K a month.
Fieldstone is furious. He spouts and sputters.
Anik is analytical.
“Dawson — why did they cancel?” Anik asks. You explain that the head of operations had received complaints from the auto sales reps responsible for internet leads. The quote was disrupting their sales methods. He continues, “What else have you heard — customer support calls, feedback from other customers?”
Fieldstone speaks up. “Let me tell you what I’ve heard. One of my guys said that no one with an msn.com email address is getting quotes — what the hell’s up with that? And another thing. You had to hack into our CRM system to get the quotes to show up in the customer record. It’s klutzy. A guy has to click three times to see the price quote that was sent to the customer.”
Anik continues with a series of diagnostic questions, all focused on customer feedback. You answer as best you can. He then asks another question. “You have said your vision is to build a full-fledged CRM system. Why?”
You sit back and stare out the window.
The auto CRM market is crowded, you say. But all existing CRMs were built to support a “hide the price until the customer is in the store” mindset, which works directly against the market trend. All major auto brands recognize that the old bait-and-switch practices don’t work anymore — consumers expect transparency and rapid response in communications. The problem is that no existing CRMs are built for transparency. And furthermore, they don’t leverage today’s technology. There’s a huge opening for a cloud-based, mobile-centric, consumer-first, transparent-communications CRM system. You might ask why we didn’t just build a full CRM system right away. The answer is that it’s a multidimensional solution that takes time and money. We wanted to get to revenue. The quoting product, imperfect as it might be, is driving revenue.
“How long would it take you to build a 1.0 version of this next generation CRM?” Anik asks.
You think for awhile. A year, you say. To do it well.
Anik asks you to leave — to grab a coffee somewhere — and come back in an hour. An hour later, you return. Fess takes over.
“So Anik here and I think you’ve proven there’s a market — consumers want instant price quotes. The operations VPs at all the major brands — Ford, GM, Honda, everybody — they’re all talking about this transparency trend. Some dealers may not like it, but price transparency is the future. They’re starting to measure our customer satisfaction scores, and they’re penalizing dealers with low ones. Consumers are tired of games. Smart auto dealers like me know it. We’re the ones that will survive and thrive. So your product has potential.”
He gathered a breath, and continued.
“But what you’ve got right now is just a feature. And it’s full of holes. You haven’t thought through how it fits into our dealer workflow. Your emails are getting hung up. You have ramped up sales without a plan, and it’s not working. You need time to create a good product — a next generation CRM — but you don’t have that time.”
Anik continued. “We don’t think you’ll get an A round done. There are too many open questions for an $8M round. So Fess and I have decided we will invest another $300K each. But the money comes with a catch — three conditions. First, you have to find another $400K of new money — to make it a million that goes into the company. Second, you have to cut your burn down to $100K a month. And third, your only priority will be to build a CRM product that thirty dealers will buy and keep. The A round will have to wait until all of these things have been accomplished.”
After a long debate, it’s clear Fess and Anik’s position is firm. As you review your options, you realize that given the most recent big cancellation, the likelihood of a VC term sheet is low. And you just don’t have any runway. You can’t take chances. You nod in assent.
Back at the office, you and Joe stay late, hashing out harsh realities. A spreadsheet showing all labor and nonlabor expenses is projected on the wall. More and more rows have been painted red. When you’re done, you’re both exhausted — and defeated.
The next day the announcement is made — there will be a significant downsizing. One by one, employee after employee shuffles into the conference room. Cheryl — Sally — Rajiv — Ricki. On and on. In each meeting, you include the same phrase: “This is not your failure — it’s the company’s failure.” You offer support, and a small severance — but it’s not much.
Last night, awake in your bed, you made a commitment to yourself that in every conversation, you would look the employee right in the eye, and you would keep mindful of the family and loved ones you were impacting by your decision. And you did. You vow to never forget how this feels.
The San Francisco space was quickly subleased to another tech startup at the same price per square foot. You laid off three-quarters of your company — thirteen good people. Other than you, the entire SparkLight Digital workforce is now comprised of just Vijaya, Beatrice (the second product manager), Joe and three engineers (Bill, Farook and Sanjay).
Seven desks have been wedged into a small conference room on the second floor of Fieldstone Toyota. Everyone is at their desk, looking at you.
“OK,” you say. “Here’s what matters now.”
. . .
- Saras D. Sarasvathy, Effectuation: Elements of Entrepreneurial Expertise. (Massachusetts: Edward Elgar Publishing, 2008).