There are no shortage of companies in need of wholesale transformation, where the strategy or execution didn’t work and they are stuck between capital needs and market realities.
These can be existing businesses with no growth or profitability, or startups with a short runway and few financing options that don’t involve men in tracksuits and gold necklaces.
When I say “turnaround,” I mean re-architecting the business around profitable growth and a clear strategy. No more “we’re changing the world” broad experimentation; just focused, deliberate execution against an appropriate game plan. A “pivot” with chutzpah.
There are myriad approaches to turnarounds: operational streamlining, profit-maximization, strategic shifts, team restructure, financial engineering, technology injection.
Our particular approach is to acquire control of the company, then hone the target market, engineer the growth engine, reposition the brand, build culture and create an operating system for the business. Or said less lamely: good people, smart tech and focus.
Whether you are buying a company or changing your existing business, the lessons are the same. To find out if you can pull it off, answer these questions:
1. What (really) went wrong?
Founders and executives are often blind to market realities. Like a bullish Mr. Magoo, they weave a complex, sanguine narrative based on vanity metrics and kind words from friendlies. This narrative can be helpful in getting through hard times, but can destroy companies if not kept in check.
Reality is better seen through the lens of dollars: are people pushing money on you to solve their pain? Or is it a tug of war? Even a few customers pulling strongly can be a sign of enough raw materials.
Most startup failure stems from no market need — 42% of failures according to CB Insights. Companies have a handful of customers, but not enough to build a company.
Mature companies stall because they lost touch with customer needs, lost focus, or a new technology changed the game.
Be brutally honest: was it product, go-to-market or both that went wrong? If the offering isn’t solving a clear pain point for anyone, turnaround will be close to impossible. But if it’s poor market execution and the product is valuable to some segment, there’s gold in those hills.
Finding that gold is the trick. So…
2. What market can we win?
Usually founders take a shotgun approach to the market when a sniper rifle is needed. Greed and board pressure force companies to hit aggressive goals. And the only way to do that is by pleasing everyone.
Great turnarounds focus on a smaller, ideal segment of the market where the offering is unique and fits like a glove.
My first little buyout turnaround was a company that helped book sellers sell online. Clearly not a unicorn market. But a market where — with a lot of turnaround work — we re-established ourselves as the best. And that meant profits and the time to look around for smart growth.
But we initially bursted in Kramer-style, full of big ideas and ambitions. It took a few months to realize we needed to be great at our one thing. All of our big, new ideas would be easier and cheaper as new companies (see question 5).
This idea is akin to the “first bowling pin” in the Crossing the Chasm model: the one small market where you are the best in the world, and where your special sauce is most useful. When you own your little piece of the world, you can opportunistically expand into closely related areas (the next adjacent bowling pins).
3. How much does profitability cost?
If a company is distressed and/or stalled, there needs to be a clear path to getting in the black.
Many startups are “default dead” as Paul Graham says, where revenue growth won’t get past their burn without more investment (which often isn’t an option). Something dramatic needs to happen.
If a company is alive and cash flow positive, but in zombie mode with little growth, it needs to figure out how much the answer to question #2 will cost.
Companies in this position must streamline operations. They likely hired too many people in the salad days of investment and now can’t see the waste around them. People may look busy, but dig deep and the inefficiencies become clear.
During the economic downturn in 2008, we cut Jive down from 165 people to 120 and doubled productivity (sales and product output) in the following quarters. The opposite of what I expected.
It can be tough to go through a round of cuts, but there is a catharsis that comes with recognition of what didn’t work. Like a bad marriage, it’s hard to work through the split, but everyone is ultimately better off.
Add to that a scrubbing of all unnecessary expenses. Rather than pull down the team, there’s a feeling of relief and empowerment that comes with profitability and everyone believing in a unified mission again.
4. Would it be easier to start over?
All things are possible — and often exciting — when mapped out on a whiteboard. It’s easy to fall in love with an well-drawn, multi-colored idea for global domination.
It’s one thing to turn around a company towards profitability and cash flow. But making it profitable *while* building a roadmap for future growth is hard.
My experience is that many of those expansion plans stray too far from the core of the business.
Using the bowling pin analogy above, you must understand if your new business is an adjacent bowling pin (close to your core strength) or whether you’re going too far and trying to hit a softball.
The further you stray from the core, in terms of IP and experience, the harder it will be to execute. Most of the time, ambitious plans are easier to start from scratch. I’m not saying you *should* start a new company (and clearly there are obligations to investors), but knowing the answer is enlightening.
The ideal strategy will exploit the company’s experience, wisdom, IP and customer list, but have a stronger focus on well-defined target market with lots of pull.
5. Will we have the team to win?
For each function, ask how you would build it from day one. What’s the ideal team, separate from the personalities in the business now. You need the right people to keep the business running and the right team to move the company in the new direction.
Evaluate the current people: can anyone operate this business or will it collapse if key people leave? Are the employees so bonded that removing some would break the whole team? Will certain people hold you back in pursuing the new direction or are they all on board?
Next, look at who you would add: How will you direct your scarce dollars towards growth? Who can you hire that will change the company’s trajectory? A good CTO? Thought leader? Sales VP from a similar company?
Build a people-plan from the ground up. Talk to people who know the company but are no longer involved to ground your plan in reality. If you can afford the right team of “keep the car moving” people and “change the destination” people, you can make it work.
Turnarounds = Honest Answers
Full-scale transformations are tough. And, as I’m learning, not every company is capable of making it through.
If you’re considering taking your company (or one you acquire) through a shift towards new profitable growth, make sure you’ve confronted the brutal truth on these questions.
