I had to make some difficult decisions, but our company weathered major macroeconomic shocks

It all happened so fast. The price of oil dropped, the currency fell 30%, and inflation shot up to 14%. The forecasts for the future were even worse, with some analysts suggesting we would have hyperinflation – over 3% per month.

I remember my father telling about the 1980s when people were paid weekly and even daily. You bought things when you had money because it would cost more the next day. He told me you could not get lines of credit and that no more imported goods were coming in. He worked for Unilever and a lot of their raw material came from abroad and he had to pay cash when collecting them.

I had no idea what to do. I decided that I had to talk with all my customers and work out immediate payment schedules. I withdrew our price list and told people we would give them quotes over the phone. I tried to get as much cash out of the country and into dollars and Euros. I ruthlessly reviewed all my costs and people and cut back to bare essentials.

At the end of the year, we had lost money but our customer base was in tact. We had gained a lot of market share and refused to sell anything at a loss. We paid more attention to stock, stock turn, and logistics and I reviewed the cash position everyday myself.

One day our major competitor called and said he wanted to sell his business to me. He was out of cash. He could either declare bankruptcy or sell the business. I offered to buy his accounts but said I did not want ay assets or people. To my surprise, he agreed subject to him joining my company. Today, we work together and dominate the market. We leaned hard lessons but we are beginning to see a brighter future.

Our company culture was changing as we grew larger

Once we had reviewed operations and our activities for the coming weeks during our weekly meeting, I asked if there were any more issues. Linda, the third person to join the company, said she was concerned we were losing touch with our roots and values. We were starting to look and act like any other company and we had lost our edge.

Others nodded their heads in agreement. I was surprised and felt a knot in my stomach. I didn’t want to talk about any of this but knew I had no alternative.

I asked Linda to give us examples. She talked about needing to consult managers for even the most trivial decisions, writing reports even though there were only 14 of us, and she felt like she was no longer trusted. Her travel expenses were being challenged; the accountant asked her about the cost of her meal at the airport and why she didn’t take a lower cost flight (even though it meant at 6 hour layover).

Others cited similar issues and said a bureaucracy was emerging. It felt like IBM, not a lean startup. They didn’t feel like they were being treated like adults. They had joined a company where they were responsible for their actions and outcomes. Now they were working in an environment where they were controlled and made accountable. This is the fastest way to kill initiative, innovation, and responsiveness.

I don't know how to prioritize and then resolve all the issues we're facing now that we're growing

We had just reached $1M in sales, a major milestone for us. We weren’t quite making a profit and cash continued to be an issue, but we had over 50 units installed and operating and our customer base was growing.

Now, we faced a series of decisions:

  1. Do we invest in new equipment allowing us to double capacity? Inflation is 9% and the currency is unstable, so it would be cheaper to buy now.
  2. Do we introduce a new produce line? This would mean more machine downtime and the changeover time would cost us money.
  3. Do we add a night shift?
  4. Do we increase the sales force? We now have three people: one has sold $600K, one $240K, and one $200K. It takes about a year for a sales person to reach $200K. We don’t know the maximum one person can sell.
  5. Do we open a new plant closer to the growing markets?

How do we figure out how to prioritize then answer these questions? We don’t have the expertise in-house or money to hire a consultant.

As we prepared for growth, we got the technology part right but overlooked training and organization

We built a platform that allows local craftsmen and artisans to sell their products globally. It took us six months and over $350K to complete the work. We knew it could handle over 40 transactions per hour and this could be doubled with some added capacity at some additional cost.

The platform was featured in India Today magazine and all of a sudden orders started pouring in. Sales soared and on a good day, we’d have 20 orders per hour, so there was excess capacity on the platform.

Last week we started to get consumer complaints. Orders were late or not fulfilled. They received the wrong product or color or it was broken when it arrived.

The biggest problem was stock outs. The craftsmen didn’t know how to update their available stock accurately. If they sold something, it stayed up on the website. New products didn’t make it on the site. Clothing sizes were off.

At a review meeting, one team member said, “We spent all our time and resources on the technology and no time on organization and training. No wonder we’re in such a mess.”

The second round valuation was lower than the seed round and my parents and friends were upset they lost money

The first round of seed capital for my business came from my parents and friends. It valued the company at $1m, which everyone was happy with. It quickly became obvious that we would need more cash within six months if we continued to grow at the same pace.

We met with Capital Ventures, who seemed interested in investing. We had several meetings and they asked for lots of information. After 8 weeks they said they would invest subject to the approval of their investment committee.

We did not hear back from them for a month. I called them and they said the meeting was postponed but they would get it to the committee within two weeks. Ten weeks passed and cash was getting low - we had less than 3 months left – when we heard that the investment committee had approved the investment and they would let us know the terms once they finished the due diligence. That took four more weeks and we only had a month of cash left.

They came to our office and said they wanted to buy 45% of the company at a $650K valuation and if we met certain benchmarks, they’d buy another 20% at the same valuation.

It was a disappointing offer, but we were out of cash and had to accept the offer. My parents and friends were very upset that they had lost money investing in me.

I can't deal with my startups' lack of discipline and systems

My to do list was growing everyday. When I looked at the list I got depressed. I could never get it all done. I was never going to catch up. I know that I should prioritize things but I do not really know how to do it. It seems simple but it is very hard for me.

As a team we also have problems establishing priorities. Everything and anything is a priority. Sometimes there are daily changes in what we must do. We are constantly fighting fires.

The CEO often tells us to drop everything and do x. This only makes matters worse. Things are half done and some things just get lost.

When a customers calls asking where their order is, we simply fill that order next.

We can't carry on like this. A business can’t be run this way and it is driving me crazy.

We weren't sure whether to price high to make our margins or low to gain market share

We were entering the market with our service business and had to figure out how to price: pricing at the top of the market or at a lower price to ease entry and build market share. After looking at different theories, we still weren’t sure what to do. If we entered with a premium price, we’d price ourselves out of 80% of the market. If we went at the lower end to gain market share, we’d barely clear a 12% margin; this wouldn’t be sustainable over the medium and long-term.

The total market was large, so it was difficult to get a realistic view of price sensitivity. Existing competitors were all over the place and it appeared that price was the primary way they were differentiating themselves and attracting customers.

We made a financial model with many different scenarios and decided we needed to get at least 35% margins to have a positive cash flow. If we priced to this margin, we knew that discounts would erode it, so we decided to enter in the top 20% of the market and then offer introductory discounts. The strategy worked.

In retrospect, we realized how difficult it would be to price up if you started with an underpriced service at launch.

Should I use cash or accrual accounting?

I don’t have an accounting background, but I do keep the accounts for our startup using Quickbooks. When I first started using it, it asked if wanted to use cash or accrual accounting. I didn’t understand the significance of the question.

My fundamental desire with numbers and finance is simplicity. I want to be able to see how things fit together. I want the bank account, my accounts, and the checkbook to balance.

Unfortunately, I chose “accrual accounting” with Quickbooks. At the end of the first month, the cash balances and the accounts were very very different. Once I started to think about this, I realized that when I sent out an invoice, I recorded a sale but didn’t have the cash. I also realized that when I recorded an expense, I had not actually paid the bill. Then I found that if I made a mistake on the invoice or the check, nothing balanced. I was totally confused.

Luckily, I identified this confusion early on. It was then easy for me to change to “cash accounting” and things began to make more sense. It’s not prefect, but it makes sense.

I wasn't thoughtful enough with hiring and we had to go through the process twice

We had six people on our team and we need two new people. One for general support and one for project management. I was nominated to do the hiring even though I had never hired anyone before. I made everyone write down what we needed the new people to do. When I read all the replies I wasn’t really clear about what we needed. I didn’t want to bother everyone again so I wrote up my own lists.

We had more than 50 applications for each job. The project managers that applied came from larger companies and described the complex projects they had managed. When I started interviewing them, they asked for a job description, which we didn’t have. Then the applicants started asking questions I didn’t know the answers to. They weren’t things we had thought about in much detail. The interviews didn’t go very well. I did, however, find three people who I thought were good and should be interviewed by the CEO.

The interviews with the CEO were a disaster. She had a completely different view of what the job entailed. Two candidates withdrew their applicants. The third was hard to get ahold of and no longer seemed interested.

We decided to start over. This time we looked at job descriptions for similar startups and positions and got templates of job descriptions off the internet to start with. The team went through these, made changes, and agreed on what we needed. The second time around, things went much better and we hired two great people.


Building a business is more challenging than building a prototype

I am an engineer by training. I love the precision and certainty of building something like a bridge. It gives me so much satisfaction. We are building a new type of transportable lightweight bridge that can be moved by a light truck. The prototype was a great success, got critical acclaim and is being purchased by the city.

I’m not as comfortable with the business side of things. It’s riddled with uncertainty. I never know what's going to happen next week. We have one order but I don’t know when we will get the second one. I always look at the bank account to see how many days of cash we have left. I keep thinking our chief engineer is going to quit. Our investors are supportive but they always have odd and irrelevant requests. I don’t know if this is meant to help or is a signal that they don’t trust me.

I cannot imagine what life is going to like in a year’s time.