Pattern Recognition, by Ian Sigalow

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The VC Fixer Upper

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The VC Fixer Upper

Introduction

I had a visit from an entrepreneur yesterday who was deliberating about whether to take on a CEO job at a venture-backed company or start a new company from scratch.  The only problem was that the VC deal had some hair on it… $15MM of paid-in capital, nominal revenues, and just a few customers. I frequently see people in this situation and always give them the same feedback: run from a VC-fixer-upper as fast as you can.

A venture turn-around is a lot like remodeling a New York City apartment.  My wife and I remodeled our apartment in 2012, and everything that could go wrong, did go wrong. Permits were delayed for months, demolition revealed wiring and pipes that changed our plans, our co-op board mandated new A/C units at an exorbitant cost, our upstairs neighbors sued because “vibrations” caused a family heirloom to break, Hurricane Sandy prevented the construction crew from coming to work for two months (in reality they took other jobs where they could make more money), and on and on and on. In the end our 6-8 week project took a year to complete, and it cost three times what our contractor quoted.

If you think this sounds bad, turning around a broken start-up is worse.

In the start-up world, three or four companies get funded at the same time to solve the same problem. If a company stumbles out of the gate, wanders aimlessly for two years, and spends all its investor’s money – it has already lost.  There is no fixing it.

The only time I have seen a venture turn-around work is when the management team pivots the business into something entirely new. This is what I tell the prospective CEOs who come to my office. If you take over a broken deal, be prepared to start over and turn it into something else. At that point you have to evaluate whether it is easier to start a company with $15MM of liquidation preferences and a tired team, or start something from scratch.

profile

Ian Sigalow

http://sigalow.com

Ian is a co-founder and partner at Greycroft Partners in New York City. He has been a venture capitalist since 2001.

6 comments
Jeremy Lichtman
Jeremy Lichtman

Found this thread via Mark Suster's post on TC.


Personally, every useful thing that I know about business, I learned via failing at the helm. Those were hard lessons to learn, but IMHO I wouldn't undo any of the circumstances that lead to my learning them.

sigalow
sigalow moderator

@Jeremy Lichtman Taking risks, struggling, and occasionally failing are all natural parts of being an entrepreneur.  But you still don't play Solitaire with a deck that is missing cards.  Better to go out and make honest mistakes with your own company, on an even playing field, than be out of contention from the beginning.

Jeremy Lichtman
Jeremy Lichtman

@sigalow @Jeremy Lichtman I think in most cases I'd agree with you. 


In some ways though, the scenario isn't much different from a large-scale corporate turn-around. For a certain kind of person, it's an opportunity to prove something. 


Assuming they can avoid personal liability (which is obviously not always a given), a win would make their career, and a loss might still open up opportunities that wouldn't otherwise have come their way.

MightyAtom
MightyAtom

@Jeremy Lichtman @sigalow

Just to jump in, came over from techcrunch - I think if you are an entrepreneur with a strong management background and know the industry very well, you could take a stab at it if nothing else was on the table, but if the venture is looking for a miracle and it's fumbled out of the gates, I completely agree with sigalow. It's not that you won't learn anything, but the main issue may simply be spending so much time to make something or to salvage first and really not even having the opportunity to define the new direction.  If you were a young manager you'd be absolutely crushed and burned out by such a task. 


If you are an experienced senior executive, we all get there because we all know to avoid the 'myth' of the turn around specialist. When we have issues, it isn't involving the entire company or our cash flow, but its a division, its competition, its a product issue, we can get time and space to make it work or cut our losses. But in a VC-fixer-upper you're compounding all the difficulties in running a start-up, plus the difficulties in a business model/product approach that isn't working or requires a re-alignment.  


There are always exceptions and if someone fancies themselves a Mr. Wolf, then maybe it's worth it for self achievement, but there are much better learning experiences out there that won't hammer you as hard.  And these turn arounds for both corporate and start-ups are extremely rare, you can name examples, but out of all the start-ups out there, it's rare. Everything can be a learning experience, but the personal toll here, * if you really go for it*, is immense and that also needs to be considered. 

Jeremy Lichtman
Jeremy Lichtman

@MightyAtom @Jeremy Lichtman @sigalow


I don't necessarily disagree with the above, but I can think of some exceptions.


I'm not convinced that the toll is any harder than failing at your own venture. In most places (i.e. not Silicon Valley), the consequences of business failure can last for years (I speak from personal experience here).


At least here, everyone understands that the new CEO wasn't responsible for the mess, and that alone can be sufficient gap to remove emotions from some of the conversations. I know that when I've done *project* turnarounds, that has been a big factor - just get everyone in the room to look at the situation from an intellectual angle.


The other consideration is that there is an existing relationship (no matter how tenuous) with the investors. I've found it difficult to establish those relationships in the first place, so there may be some value (in a value investing, cigarette-butt, way, perhaps) inherent in that.


I think you hit on the key point though - these are rare opportunities in any case, and a person considering this role would need to carefully select which ones they would take as well. There isn't exactly a well-defined market that can be arbitraged here. That probably means this seldom happens in practice.

Cliff Frescura
Cliff Frescura

@sigalow @Jeremy Lichtman  In the end someone may see value where others do not.  Someone may be able to address a market need where others do not.  The fun thing about fixing things is that most of the pieces of the puzzle may be there, they simply are not put together in an optimal way or just need a few missing pieces.

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