logo_red

REAL TALK ON
ALTERNATIVE INVESTMENTS
BUSINESS & FINANCE

Crowdfunding
When to Pivot, When to Fold: What Every CEO & Investor Needs to Know

Crowdfunding
When to Pivot, When to Fold: What Every CEO & Investor Needs to Know

Dara Albright



The thing that excites me most about today’s crowdfinance-inspired path of capital formation is its unprecedented ability to mitigate shareholder risk and groom more productive businesses. It does this by allowing companies to gauge consumer demand and presell products prior to it outlaying any manufacturing, marketing, or other expenses.

Now that crowdfunding has reached the mainstream, there is really no excuse for any company – from startup to corporate conglomerate – to risk significant capital expenditures on an unproven product. In fact, the failure of a rewards-based crowdfunding campaign can usually be the earliest determinant of whether a startup should pivot or fold.

Yet what about those companies that aren’t launching new products, but are instead finding that their existing offerings have simply gone stale? At what point does a CEO stop wasting valuable time and shareholder money on undesirable merchandise and flawed business models, and start thinking about pivoting or folding? The answer may lurk in the clues listed below.

When a Company Becomes Dependent on Investors for Survival

Investors are not there to salvage a business, they are there to help launch and nurture it. There is a big distinction. A company should be sustained by its customers – not by its investors. If investor capital serves as a company’s life-support, it’s time for the CEO to consider perfecting her product, developing a new one or simply throwing in the towel.

Much to the chagrin of some CEOs, consumers can’t be bullied into purchasing goods and services. If this was an effective advertising strategy, Don Draper would have already created a slogan which read, “Buy this product or we’ll cut you!”

Trying to shove an unwelcomed product down people’s throats is a complete waste of time, and it only prolongs the inevitable. It’s just not fair to ask shareholders as well as employees to keep hanging their hopes on someone else’s pipedream. Once a company becomes dependent on investment capital for its survival, a CEO’s only ethical decision should be to either pivot or fold.

When “Gonna” is All You Have Left

Once a company passes the seed stage and its business is no longer a mere idea, it’s time to start executing. And by executing, I don’t mean disseminating “gonna” press releases which essentially announce what a company intends to do. Falling into this category are partnerships that bring no quantifiable revenue; new hires who have yet to complete a sale; office openings that aren’t turning profits; the introduction of unproven, untested and unfinished products; as well as my personal favorite: website re-launches. Here’s a newsflash: anything that is NOT immediately accretive to revenue is irrelevant to shareholders.

If, after a few years in business, these are the most newsworthy items a CEO can conjure up, it is probably time to either pivot or fold.

When the Numbers Won’t Add Up

1-5=4, right? Um, no, 1 minus 5 does not equal 4. It is actually equivalent to NEGATIVE 4. I realize that this could be very confusing. Even our federal government consistently gets this very basic first grade math equation wrong. Think of it like this: if a company’s burn rate is rising while its sales are declining, it’s probably a good time to start contemplating whether to pivot or fold.

There is a very important exception to this rule. Not all expenditures carry the same weight. For example, a company holds more promise if its R&D and commission costs are increasing than say its management’s salaries, rent related to an unjustified office expansion, travel & entertainment expenses, legal fees associated with unwinnable litigation and off course those charges related to a pointless website makeover.  Despite what some want to believe, investors don’t exist to fund a CEO’s legal battles or pick up his Peter Luger’s tab.

When You Have a Sixth Sense

Some CEOs just have better gut instincts than others. One of the keenest business executives I had the privilege of knowing was a chairman of an Internet company that went public in the weeks prior to the 2000 dot com crash. Upon noticing his employees exhibiting post-IPO-complacency (yes, it’s a thing) as well as sensing market turmoil, the chairman enacted a spending halt and sought a merger candidate possessing a more sustainable business.  Had he not intervened the stock would have likely gone to zero and ended up in the dot com graveyard. Instead, the stock is now a biotech trading on the NYSE with a market capitalization more than double that of its IPO valuation.

Most recently, upon realizing that its product wouldn’t succeed, a venture-backed startup called Secret Inc announced it would be returning its investors’ money. According to the company’s founder, David Byttow, “Secret, Inc. still has a significant amount of invested capital. But our investors funded the team and the product, and I believe the right thing to do is to return the money rather than attempt to pivot.”

In addition to possessing a good moral compass, a true leader acknowledges his product’s flaws as well as his mistakes. He grows from them, and uses them to perfect his business and create shareholder value. But, he also has the acumen to know when it’s time to cut losses and move on. Although this takes a great deal of courage, there is much more dignity in shutting down a flagging business than there is in stringing investors along with the pretense that their investment is appreciating.

Both entrepreneurs as well as investors would be best served by heeding the wisdom of Kenny Rogers: “You’ve got to know when to hold ’em. Know when to fold ’em. Know when to walk away. And know when to run.”

 “This article was originally published on Crowdfund Insider on May 21, 2015.”

Dara-albright-150x150

Dara Albright is a recognized authority, thought provoker and frequent speaker on topics relating to market structure, private secondary transactions, next-gen IPOs, P2P and crowdfinance. Albright has held a distinguished 22 year career in IPO execution, investment banking, corporate communications, financial marketing as well as institutional and retail sales. She is a visionary who continues to introduce rising asset classes and crowd-structured financial products to the Wall Street community.
















































Fintech

Getting in on the Groundfloor


Dara Albright



















Alternative Thinking on Today's Market Events

The Daily Alpha - 09.21.15


Garrett Baldwin


Assume Breach


Garrett Baldwin


Currencies

The Week Ahead for Forex


FXHQ.com


Alternative Thinking

The Daily Alpha - 09.18.15


Garrett Baldwin


Alternative Thinking on Today's Market Events

The Daily Alpha - 09.17.15


Garrett Baldwin


Alternative Thinking on Today's Market Events

The Daily Alpha - 09.16.15


Garrett Baldwin



Modern Trader

Rise of the Ethical Hacker


Garrett Baldwin





QOTD

Quotes of the Day


Garrett Baldwin



Modern Trader

Why are Hedge Funds Hiring Poker Pros?


Garrett Baldwin


Gambling and Gaming

Wall Street Casino


Garrett Baldwin


Gambling and Gaming

Investing: A Pretentious Word for Gambling?


Doug Litowitz


Gambling and Gaming

Gambling and Gaming: A Common Thread of Risk


Michael Stegemoller, Baylor University


Gambling

Where Gambling Meets Trading


Modern Trader, William Ziemba





Cybersecurity

Fire-sale: Were Three Leading Organizations Hit By A Global Cyber-Attack?


Dr. Timothy Summers and Dr. Joseph Wall


Real Talk

CNBC Demystified


Doug Litowitz


Modern Trader

False prophets


Garrett Baldwin, Illustrated by Mario Zucca


OTC

Why OTC is Back in Vogue


Edward Lopez



Modern Trader Magazine

Does Your Alma Mater?






TAP Innovation Series

Alpha Pages Innovation Series: Acorns


Garrett Baldwin


Alternative Energy

Yield Cos? More like Yield Can’ts!


Bryan Birsic


Vice Spending

April Vice Index Shows Strong Rebound


Andrew Zatlin


Disruptive Technology

Part II: Possible Hedges Against the Robot Apocalypse


Garrett Baldwin


Disruptive Technology

Part I: Possible Hedges Against the Robot Apocalypse


Garrett Baldwin


Water Investment

Rick Rule: Time to Change California’s Water Policy


Global AgInvesting


Insider Trading

Why The Second Circuit Refuses to Reconsider Its Newman Decision


Jonathan N. Halpern, Ehren M. Fournier


Futures Magazine

logo_red

ENTER YOUR EMAIL BELOW TO FOLLOW THE ALPHA PAGES

Art, Antiques & Collectibles • Forestry • Film Investments • Alternative ETFs • Wine, Spirits & Cannabis • Hard Assets • Sports & Exotic Wagering • Oil & Gas Exploration • Startup Investing • Private Equity • Treasure Recovery • Commodities • Digital Currencies • Peer-to-Peer Lending • Venture Capital • Hedge Funds • Private Real Estate • Managed Futures & CTAs • Forex & Derivatives Trading • Alternative Energy • Futures & Options