We had an acqui-hire and it’s our fault
One of our portfolio companies that we’ve been invested in for years recently was acqui-hired. The founders worked their asses off for years, it’s not the outcome anyone ever wants to see, and as investors frankly we failed our founders along the way. Here is what we learned:
Capitalization. The company was chronically undercapitalized, which means we just didn’t have the balance sheet to grow or withstand real shocks. To give you a sense of how undercapitalized, the company’s average cash balance for years was under ~$120k per month and never eclipsed $200k. When you don’t have a balance sheet (low cash or general liquidity), things that a typical company can withstand like a large customer loss or a poor executive hire become crises. A few things drove the undercapitalization: i) the company had small investors that could only write small checks, and that includes us. Our check now is up to $4mm, but at the time we invested, we were sub $1mm, and we were the largest investor; and ii) the company was based in the Midwest, which did it no favors. While the cost of labor is lower in the Midwest, the lack of proximity to large venture capital is a big problem. As a company we didn’t grow fast enough to attract capital from the coasts, so chronic undercapitalization was our state. When it’s time to raise, try and attract more capital than you think you need. Try to locate yourself in a venture capital hub (SF, Boston, NYC, Austin). Be stingy with the capital you do raise as if you wont be able to raise again.
The lure of SMB. We served SMB’s who churned off a lot. As investors we didn’t push the company hard enough to move away from this customer group. Because of undercapitalization, we wanted the quick cash that SMB customers provided, and didn’t appreciate the fact that servicing customers that churn inside of 2 years have a negative LTV in SaaS. While SMB’s might be the way you start to build your business, try to get to enterprise class customers as soon as you can. Very few large companies have ever been built off of SMB customers only.
Customer focus. Once we figured out that our best fit customer was actually large enterprises (the product was really robust), we didn’t push hard enough for the company to focus on that ICP. If you figure out your ICP, focus on them, and forsake all others. That’s a rule to live by.
VP of Sales. We hired a VP of Sales way too soon and were supportive of the hire. This individual of course didn’t work out, and the cost of that executive hire combined with the time lost ended up being a real blow. You should only hire a VP of Sales when you have 5 or more good account executives reporting to you, and it feels like all you do as a CEO is sales. By then, you’ll know what you need in a VP of Sales, you’ll know your customer very well, your AE’s can weigh in and make sure you hire the right candidate that they’ll mesh with, and should that VP of Sales fail, you’ll know how to step back into the sales leadership role while you source another candidate. Do not hire a VP of Sales to build out your sales team; hire a VP of Sales to manage your sales team. There is a big difference.
State of Incorporation. We were incorporated in a mid-western state that was extremely friendly to employees. Some employees who we fired ultimately knew this and inevitably sued us for frivolous bullshit (the VP of Sales sued us for age discrimination even though we’d hired him 8 months earlier when he was the same age!). It cost a lot of time to fight and ultimately settle those cases, and we made a business decision every time to just pay them out. Know the labor laws in your state, and do not incorporate in a state with labor laws that are overly friendly to employees. We probably wont invest in a company incorporated in that state again.
Bad acquirers. Two years ago, we went down the path with one acquirer that ultimately didn’t work out. This acquirer was spearheaded by a guy that didn’t know what he was doing, was combative, and ultimately re-traded us days before closing. The deal inevitably fell apart and we were saddled with a $100k+ legal bill, a big distraction, and time lost. If you’re dealing with an acquirer who is at all shifty, acrimonious, or just gives you a bad feeling, walk away early. We should have killed the deal early on ourselves, but we wanted the outcome.
Product misfire. We placed a few bets on products that ultimately didn’t work out. At the time we all thought these would be game-changing products, and they were costly and time consuming to build. When customers ultimately didn’t adopt the new offerings, these ended up being big capital misallocations that we couldn’t afford. Our core product also suffered because the smaller features customers wanted were delayed or de-prioritized. The lesson is if you’re small and don’t have a large balance sheet, do not take big expensive shots with the direction of the product. Betting on game changing new products is allowed only when you can handle a misfire.
We loved the founders on this deal, and ‘we’re friends to the end’, so frankly we’ll probably never get over this outcome. They worked incredibly hard, took pay that was well below market, and were just flat out good people. We learned a lot from the ways we failed the company as their investor, and hopefully you will as well.
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