On the edge of the hockey stick

The typical claim of startups is that they will have revenues that look like a hockey stick. Limited traction, more costs than sales, working for little or no pay, etc. Then, seemingly over night, sales increase, funding increases, the business accelerates, and it's off to the races.

I've had this experience a few times, and it may not be what you imagine it to be. It's a lot more fun from the outside than the inside. Of course it's better than the part where you're losing money, spending time, worrying about how to feed your family, selling your car for cash to keep the business from dying, etc. But there is this period between the things that will start the acceleration and the charge up the sales curve, at the leading edge of the hockey stick.

Approaching the edge

Several companies we work with are in this position today, as is one of the companies I control. From the inside, it's frustrating as the breakthrough is about to happen but hasn't quite happened yet. And yet there is excitement and anticipation as one after another roadblock gets cleared and one after another emergency gets handled.

• Company 1: They spent 6 months with no funding, went to previous investors, pitched to hundreds of people, and got another $25K here and there. Enough to stay alive, but nothing more. Then the CEO got into a collaboration with a larger company in a closely related space, got help and support from their executives, got their completed technology platform built, and is just releasing their first service offering to beta testers. We got them in touch with some serious capital in the last few months, they got a letter of intent, got some bridging funds, and are on the path to a $2.5M funding from a single source within the month (or two). They are psyched, but still inching along. They transitioned into a C corporation to facilitate the investment, converted their LLC shareholders over, got the subscription agreements and related legal paperwork in place, and so forth. Next step is all paperwork at this point, but that sometimes takes forever, and almost always takes a few weeks or months or years, somehow longer than you might have thought. They are starting to accelerate as their test market is working and they are preparing to transition into unlimited expansion, and they almost certainly will grow in the coming year or two or three. At the knee point the questions is how far you can go how fast - the slope of the up-curve.

• Company 2: This company is young by comparison. They have a very direct business model, and they have a viable offering that scales to millions of customers at low cost and automatically. It has taken them only about a year to get to the point where they are ready to sell the first offerings, and they have been lining up clients over that year. They have put in substantial cash and time, and are currently running tests with customers. They are well experienced business people with good connections and sound business sense. They are experienced and even tempered. They have generated signed contracts for future items and the channel partners are starting to close the outbound business. And those channel partners are just at the edge of generating cash. The burn rate is reasonably low, the unit costs are low enough to afford good margins, and it only takes a small portion of the large market to make them profitable. It looks like they will start to scale in the next few months. But there are five or ten opportunities that could send them up the acceleration path or fail to be realized. This is one of the easiest knee points I have yet seen, mostly because the people running the company are experienced and know how to plan and execute. But they are not yet scaling, they have spent a year and plenty of cash, and in the next few months, we will see... or perhaps still be almost there!

• Company 3: This is one of my companies, and they are poised to be an overnight success after 10 years. Of course we have had successes, but we have also been in and out of stasis. One of our largest (enterprise) channel partners engaged us in one sale 2.5 years ago, and has built follow-on business of 12 times the initial sale (which they get, not us) and renewed one of their prior contracts for 5 times that amount as a side effect. But a high level executive was systematically blocking our progress, so even these great results (worth tens of millions of dollars to the channel partner) didn't produce further sales. That executive recently got fired after destroying half the channel partner's business and firing half the staff in this area. But now, the tide is changing as internal forces friendly toward us are taking hold. In our case, the channel strategy is working (albeit very slowly), but channel partnerships with large enterprises usually just take that amount of time. Big ships turn slowly. It looks like a knee point is about to happen, but there are no guarantees. And part of the deal is that by paying attention to the upcoming potential, other opportunities may be lost.

Opportunity costs: welcome to risk management at the knee point

Knee points are dynamic. And that's why risks and rewards change so quickly. Limited resources have to be applied to seemingly unlimited opportunities and responsibilities. Do you spend more on execution to pick up the pace, or do you spend more on sales and marketing to close all the deals you can as soon as you can? If you choose more sales, you could destroy your reputation and lose the whole of the future business because you haven't spent enough on execution to be able to perform up to the need. If you spend too much on execution, the burn rate goes up and you hit the ground sooner.

The uncertainty about the future becomes very wide ranging near the knee point, because it might be a false knee point and you don't know how much the curve will really bend. If you miss the opportunity and it is real, you blow the years of effort and waiting. But if you put in the extra resources to succeed and the knee point doesn't happen, or the bend in the curve is not enough, then you could fly the plane into the ground, or perhaps worse, end up sucking another 5-10 years of your life barely eeking out a living. Which brings me to my sprained knee...

Focus of attention

I recently sprained my left knee. I couldn't walk on it at all. So I put on an ace bandage and bought a cane, took the right drugs, ice and heat, and I sat as much as I could for several days. But as it turns out, I still had to get around, up and down the steps to my office, to and from the bathroom, etc. In the process, I put far more weight and strain on my right knee. So as my left knee got better, my right knee got worse. At this point, both hurt, but I can get around, and I am taking my daily walks, with some pain along the way. So I risked my right knee by helping out my left knee. They are both hurting now, but I think they are both getting better.

This matches with businesses and lives. One is getting the oxygen sucked out of it because of all the attention paid to the other. The other, flying toward the ground, but about to accelerate, we hope, being saved or grown (or not) by the increased attention. In my case, the personal life is largely settled and long has been. But this is often a cause of tension in younger entrepreneurs approaching and at the knee point.

I reduce available resources (my focus of attention, investment in its future, etc.) from one of my business efforts to help another all the time. It's just normal enterprise resource management. When I hit a knee point, I put in more resources to help make sure it can make the turn. I hate it when my businesses go off the rails because the driver wasn't careful enough in the turns. All the more when I am the driver.

Right now, both knees are hurting. Both businesses, the one at the knee point and the one getting less attention, are also suffering. One from the extra resources requirements for making the knee point pay off, the other from the resources taken from it to help the first one succeed.

This is where adult supervision helps a lot. You have to have friends.

Who shall advise the advisors?

One of the things about getting older is that there are fewer and fewer people more experienced than you to help you out. When I was younger, I could go to a more experienced person for help. But today, most of them are retired or deceased, and I find few if any people more experienced at startups than I am. So I talk to my peers and listen to less experienced folks.

This is a two-pronged approach.

• I figure I can only learn more about more things by engaging with less experienced folks and adding their experience to my own, tempering the learnings with my judgment and the knowledge it is second hand..

• On the other hand, I often discuss issues with folks around my experience level in business (and in my personal expertise) with the idea of finding out what they did to solve similar problems and getting strategic ideas.

From my experience-based peers I find others facing similar problems, and we come up with ideas for each other, discuss the good and bad points, and come to decisions, usually on our own. We share the experiments and results and try to make half the mistakes we would each make on our own.

From younger folks, I learn from their exuberance, which I once had more of. And of course they learn from my experience. I love it when I hear a great idea. I love it when I ask myself (and them) "Why didn't I think of that?". They share good and bad and I share the same with them. They find out they are not alone and I find out more about the decisions I made when I was younger.

How does that translate into better decisions?

At the end of the day, the CEO is responsible. I make decisions and they have consequences. So does every other CEO worth having. If they don't agree to this the board should throw them out.

The concept of better decisions by getting a group process in place is longstanding. By engaging with different experts with different skill sets in a group environment, better decisions tend to be made. But at the same time, committees tend to produce camels which work great in the desert but are ridiculous compared to race horses on a track. Horses for courses comes to mind.

My view is that a good CEO brings many views to the table, especially ones that disagree with the CEO, wherever feasible. The loyal opposition. I want to know the issues on all sides so I can weigh the risks with the rewards and make decisions. I fully and freely admit that another leader might make another choice. But in the end the CEO makes the decision, hopefully in light of much or most of the available quality information, but importantly, not in a vacuum or an environment of "yes" folks.

I just finished my morning walk, and my knees feel a little bit better. I am just finishing my monthly article for A2E, so my businesses feel a little bit better.

At the knee point, staying focused on deliverables helps reduce stress. When you cannot make a strategic decision right now, get something else done. Then you have more resources available for the decision and that much less to do. Every small win is another step toward the goal.

I think more quickly early in the morning when I get up. So I go for a walk and think. Some folks don't get their brain up to full speed for a few hours, so they allocate resources their way. Finding the best way to use your time when your mind and body are in different states makes you more efficient and makes for better decisions.

These and a thousand other things all come into play at the knee point. When the going gets tough, the tough get going. The great ones play hurt. All those sports saying come to mind. It takes motivation and persistence and stubbornness to get to and through the knee point. And you will win or lose by the quality and timeliness of your decisions. So get help and use it well, but then make your decisions and carry them out.

In summary

Risk management is much the same for my knees as for my businesses. When one is hurting, you have to apply the resources to make it work, or decide to abandon it. OK - I'm not going to abandon my knee unless I am really out of choices. But analogies only go so far. I am unlikely to abandon one of my businesses until I run out of choices... or it grows and I end up selling it. I am certainly not going to sell my knee. Although I may have to buy a replacement for it some day.

Near the knee point, businesses are almost always hurting. It's usually better to make the decision to stop earlier rather than later, but you usually only know you are going to stop later rather than earlier. For those who are going to go forward with reckless abandon, it's a resource allocation problem and it is greatly aided by your mentors, peers, and advisors, if they are doing their job and you are using them properly.