CEOs of midsized companies who make big bets can lose the farm. The executives of Fortune 500 companies might be able to lose the same bet with impunity, and the founders of venture capital-funded startups are only renting the farm (with the VC’s money) anyway. But for a midsize company, an ambitious investment that you don’t have the wherewithal to execute on can be fatal.
These travails don’t just happen to declining midsized firms making the business equivalent of a Hail Mary pass. In fact, rapidly growing midsized companies are even more vulnerable to running out of cash while gunning for growth than are shrinking firms. Even what appears to be a small investment risk can turn into a big one, especially when information technology comes into play.
That was the case at a toy importer that was pressing the growth pedal to the metal. The company was hell-bent on entering a new market but knew it had to automate its warehouse to do so. Warehouse automation systems are big and complicated; if they don’t work, you’re worse off than before since it becomes almost impossible to ship product. Unlike a Fortune 500 company that can spend tens of millions of dollars on external consultants to help implement such a system, this company was stingy with its IT dollars. It put one of its executives in charge of the project and told him to team up with the head of IT, even though neither had ever run a project this large or complex.
The project budget paid for the software and not a lot more. The timeline was unrealistic, so the installation took a month longer than planned. And when the company did the cutover – right before its customers’ biggest selling season – the system just . . . didn’t . . . work. The malfunction caused major delays shipping toys to retailers. Not surprisingly, many of those retailers refused to pay when the toys finally did arrive, too late for the holiday season. The importer lost millions of dollars and began running out of money. Its growth had been derailed.
This particular toy importer violated every one of the rules that govern the success of a midsize company’s strategic initiative: It gave an unproven team an unrealistic budget and asked it to do a highly technical, risky, but mission-critical job without strong external partners or a proven implementation process.
In contrast, one California manufacturer of data storage equipment grew by making a much less reckless bet. BlueArc was venture-funded, but in 2008 VC money was getting hard to find. (The chill winds of the Great Recession were blowing through Silicon Valley, too.) BlueArc’s devices were high-end, but its management believed it needed a mid-priced product to get it through the recession. However, cash flow from operations had shifted from positive to negative, the company’s cash pile was dwindling, and the new product would demand R&D investment.
BlueArc’s top team remained confident because they knew the company was strong in three critical areas:
- The ability to predict the market. BlueArc’s CFO, Rick Martig, and other executives gathered market data to support the investment in the mid-tier data storage product. Poring through the IPO documentation of several larger competitors that had introduced similar devices, they produced a set of financial data that showed the growth and profitability of competing products. That helped BlueArc raise another $28 million in VC funds. Then it cut general and administrative expenses and sales staff to contain operating losses. The company’s leaders promised the board of directors (largely, their VCs) they would make further cuts in areas not related to the new product if the company fell short of its sales and profit targets.
- Their ability to execute. The R&D team that had brought the company’s successful higher-priced data storage system to market had no doubt that they could pull off a lower-priced version. Blue Arc’s R&D had a track record of success; it was a proven team.
- Forecasting acumen. Martig was a seasoned CFO with years of forecasting experience in technology firms. He knew where the surprises would come from, and he built them into the forecast.
BlueArc’s new product hit the market and was an instant success. The company achieved its forecasts which, after 18 months, enabled it to break even. By 2011, the company revenues were $86 million, and it filed for its own public stock offering. But before that could happen, a much bigger competitor made an offer that the VCs couldn’t refuse, one that was a strong multiple of revenue.
Like the toy importer, BlueArc made a major investment risk: developing and launching a new product while cash was dwindling. But the difference was that BlueArc’s bet was highly informed and far better executed than that of the toy importer.
It had to be. Most midsize companies – especially those that aren’t VC-funded – never recover from ambitious investment bets gone bad.
Robert Sher leads CEO to CEO, a consulting firm of former chief executives that improves the leadership infrastructure of midsized companies seeking to accelerate their performance. His book (Mighty Midsized Companies: How Leaders Overcome 7 Silent Growth Killers) will be published this fall. He can be reached at firstname.lastname@example.org and @RobertSher.
IMAGE CREDITS: http://life-love-money.com/