Weathering Crises in a Young Company

This is part 2 of a 2-part series. Read part 1 here.

If you’re the chief executive of a young company, you will at some point almost certainly face an existential crisis that threatens to take your business under. I know I did during my time as the CEO of iSuppli, an electronics market information company I founded in 1999. Over the ensuing four years, a series of crises brought the company to the brink of extinction—crises that typify the threats young companies often face. How our company weathered those storms provide some useful lessons in company preservation, including these three.

Listen to early customers until it hurts. Your first crisis is likely to come when you’re trying out your company’s offering with potential customers early on. iSuppli was intended to make the electronics industry more efficient by giving companies improved tools and visibility into end-customer demand and the status of all the various supply chains on which their operations relied. But as often happens when you’re selling a business-to-business concept, the bosses at your potential client company may understand your idea, but the people who will have to implement it feel threatened.

With a savvy executive VP at our potential first client, we had reached a handshake deal to implement our ideas for one year on an experimental basis. But at every implementation meeting we were peppered with objections, showered with alternative interpretations of facts, and treated to many emotional outbursts from the client’s implementation team. And there were some real technical issues. Even the EVP began to lose patience.

In response, I dedicated several full-time people to act as ombudsmen for the customer. My investors and key executives protested. They thought we were going backward—in effect, reinventing the solution. “If that’s our new business model,” said one investor, “we’ll go out of business fast.” Thinking that it was better to go out of business fast rather than immediately, I proposed the plan to the EVP. He was delighted. He understood that our experiment and our dedicated personnel were basically subsidizing his business. Things then went smoothly and at the end of the one-year experiment we were able to withdraw the extra people. Admittedly, we didn’t make any money from that customer for a couple of years, but we managed to stay in business and we refined our offering and prepared ourselves to respond to future customers.

“Because Plan ‘A’ rarely works as expected, young companies should have plan ‘B’ at the ready—and EVEN plans ‘C’ and ‘D’.”

Don’t let anyone bigfoot you. About a year later a potential customer—one of the biggest and most respected electronics companies in the world—liked our proposed solution so much that they decided to go into the business themselves. Worse, we soon heard that the CEO had personally called several of our potential clients and offered them joint venture partnerships, potentially giving her company a huge lead in creating a more efficient global supply chain. It was as if a bomb had gone off at iSuppli. We felt dazed, injured and afraid. Several of our investors said game over.

Giving up might have seemed the logical thing to do. But my previous experience as CEO of International Rectifier dealing with industry behemoths told me that they could neither analyze situations nor implement solutions as fast as a nimble specialist outfit like iSuppli. The threat just made us even more determined to build out our capabilities rapidly and outflank Bigfoot.

Be prepared to refocus the business—radically, if necessary. Fast forward another year. iSuppli was starting to find its groove. We had 175 employees and a couple of demonstration engagements going with a handful of clients in locations around the world. We were moving millions of electronic parts a week. We were a 24/7 global operation. And our sophisticated supply chain management and information gathering processes, which we had exclusively developed, were reducing the volatility of the supply chains we managed.

Then we became a victim of our own success. Our largest, most sophisticated, and highest-profile client declared they were ready to commit to our platform globally if we would commit to investing in a global build out. But this was right after the dot-com bubble had burst and the $15 million dollars we needed to meet the client’s request was scarce. Our investors said they would somehow get the money we needed if the client would give us a multi-year contract with a minimum guaranteed payment that would at least cover our extra costs. But the client refused to even consider guarantees. They decided to go with our less sophisticated but better financed competitors. Unable to raise the money for a global build-out and with the defection of our highest-profile customer, we found our other supply chain management customers abandoning us.

Because Plan A rarely works out as expected, young companies should have plan B at the ready—and plan C, plan D, and so on, for that matter. My plan B was to focus on all the ways we helped our clients improve their supply chains that did not require deploying major global infrastructure. We had created world-class data collection and information analysis teams who had in turn created unique and valuable data subscription services that our clients did not want to see go away. It was exactly the information I had wanted at International Rectifier, information that nobody could yet provide about inventories, capacities and how many products of which type were being used by which customer. Such information, when combined with iSuppli’s supply chain management software and processes, helped us manage supply chains better than any customer could. Up and down the supply chain everyone wanted this information. We had already started selling our data and information independently of our supply chain services while we proved out the other aspects of our business model. Those data and information services represented about one-third of the revenue we were earning at the time of this calamity.

So when I couldn’t find funding, I decided to shift iSuppli into being a “market intelligence provider” to the electronics world. But it required laying off three-quarters of iSuppli’s employees. I had been up front with all employees throughout the crisis, providing weekly updates on the search for funding and talking candidly with employees who came by my office seeking the latest news. When all was said and done, nobody was surprised by the layoffs. More importantly, not a single person critical to maintaining our data collection and information business lost confidence in iSuppli and left the company.

There were other crises to come—including one where I was compelled to forgo my salary, take a second mortgage on my house, loan the company money from my savings to tide it over, and eventually come up with a complex loan participation plan with investors to keep iSuppli afloat. We continued to grow quickly and we used the loans to finish building out several valuable new data services that further accelerated our growth. The loan package not only saved the company, but worked out well for everyone—investors, employees with generous stock options, and me when iSuppli was sold a few years later for $100 million. The overarching lesson: Don’t retreat, don’t surrender.