The Six-Month Fix: Adventures in Rescuing Failing Companies by Gary Sutton

Author:Gary Sutton [Sutton, Gary]
Language: eng
Format: mobi
Publisher: John Wiley and Sons
Published: 2001-11-27T14:00:00+00:00

CHAPTER 34

TURNAROUNDS YES, STARTUPS NO, AND WHY

This is for you sick puppies who want to become turnaround managers. You’re also smart, by the way, and will learn why in a few paragraphs. At the end, you’ll get tips on starting.

In 1995 Crosspoint Ventures, a huge VC fund with great returns, asked me to look at a troubled investment.

This floundering company made audio and video mixers, used mostly in the entertainment business. Their offices were within a comfortable drive of my home, a rare pleasure, and the business enjoyed some revenues.

But the customers were filmmakers. The thought of spending lots of time in beautiful Burbank, the marketplace, going from one single-story production house in tan stucco, on streets so dreary that strip malls looked pretty, underwhelmed me, but where the opportunity is good the environment is rarely perfect.

So I checked the numbers. This startup’s first product, the not-so-revolutionary one, was selling and growing. But the investors’ hopes and dreams were built around the next-generation device. Faster, better, easier, but more expensive. Tough to build.

I counteroffered to the investors: “Instead of the 5% of equity up front and $200K salary, how about $100K and 10%? More important to both of us, you committed to putting in another $4 million if I join. My deal is that you keep your $4 million, but possibly sign a credit line for $1 million.”

My thinking was that I could get the business to break-even cash flow, or better, on the first product and shelve the second one, watch and see, move slower, and risk a little less until we got smarter.

My phone sat there. Silent. No response. I called the lead investor. He couldn’t get off the phone quick enough. That same month I started negotiations with a CD-ROM publisher in Arizona, one that with a packaging concept became the biggest disc distributor in the world for a brief, shining moment. They were making money but had a subsidiary that was bleeding to death.

Same deal. The owners couldn’t stand the thought of not putting more money into their loser, so we never shook hands.

This was 1995. An epiphany. It was clear my skill, making money from a business that had no place to go for more investment, was being eclipsed. The world had too much cash.

So it seemed time to shift to a startup. Spend a few years building a business and absorb that money the world wants to give. We started SkyDesk in 1996 and raised about $59 million in the following five years with six financings, each one with higher-priced stock than the one before it. This was fun and it fit the times.

But it disturbed me to realize it in 1995, because turnarounds are so much more rewarding and pleasant than startups.

Huh? Yes. Listen.

When you join a startup, the investors are pumped up, the employees eager, and everybody’s hoping to get rich on stock options. The CEO gets 7% of the equity in options, vesting over the first four years. The board meets monthly and since they’re all investors, they’ve got ideas on how the business should be run.

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