No Guts, No Glory?
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Companies on the fast track often bend the rules with investors and clients to keep up their growth curve. In the following excerpt from MoneyHunt: 27 New Rules for Creating and Growing a Breakaway Business (HarperCollins), authors Miles Spencer and Cliff Ennico, co-hosts of MoneyHunt, a TV show featuring entrepreneurial success stories, tell the tale of one entrepreneur's say-anything strategy that won over clients and investors.
Successful businesspeople are, first and foremost, salespeople. If you cannot sell, do not, we repeat, do not start your own company. We're all comfortable selling ourselves when we're certain we can deliver all the things we promise. But what about the times when we're not sure we can deliver? We've been told since childhood it's not wise or ethical to promise something if you know there is a risk you'll break a promise. Sometimes, however, being a successful salesperson and getting the big deal that makes or breaks your company requires that you do precisely that. And that takes sheer audacity.
When you sell audaciously, you're taking a big risk. Except in some extraordinary circumstances, you won't get away with it. In the short term, you can succeed with BS. But sooner or later, you have to prove to the marketplace (and to yourself) that it isn't just BS. You have to back your words up with real performance.
The Audacious Entrepreneur
Chris Sardoni (name has been changed) started his Web page design business right out of college with a rowdy bunch of his former fraternity brothers, convinced they could make a go of it in New York City's "Silicon Alley." With operations in their one-bedroom apartment on the Upper West Side of Manhattan, things looked surprisingly like they did at college, except now there were a few more computers, some high-speed access lines to the Internet and a little money.
Before they had even created a single Web page, they had pitched and won a project for a major toy company that wanted to build a community of avid game players. Chris knew the toy company was flush with cash, technologically incompetent and under pressure to catch up. Still, they weren't committing just yet. During the presentation, a critical moment had arrived: Chris had to shine now, or risk losing it all. It was a spot he would find himself in more and more.
Business negotiations are often like poker games, and Chris had played a lot of poker in his college fraternity. He knew well the meaning of the old poker adage: When in doubt, bluff. "I want this to be a big program with a big commitment that would make a major impact on the community," he said. He and his "staff" were busy on multiple projects, Chris said, and had to manage their time diligently. So if the client said no now, they may lose the opportunity to work with Chris and his design team for up to 12 months.
Chris referred to projects he and his partners had worked on, failing to mention the fact that they were in college at the time and didn't truly deserve credit for the creation. He even listed as current commitments a few projects that his technical person was thinking about doing someday but hadn't really started. The client started looking interested: No middle manager in a large corporation wants to be known as the person who had the opportunity to work with the hottest up-and-coming Web design team but turned them down because they looked like kids.
Chris had them hooked, and they were just waiting to be reeled in. So the master poker player upped the ante. He told the prospective client he was going to sketch out contract terms on his computer then and there for their review, because he had meetings that afternoon and the next morning and would not have time to focus on the details. The toy company took the bait and signed a memorandum of understanding that very afternoon.
Chris's design team worked evenings and weekends and developed an award-winning Web site for the toy company. Soon Chris was getting telephone calls from other companies who wanted "the same people who did that wonderful site" to do their Web site design work. Chris struck fast, making the same promises he had made to urge the toy company to sign.
With several projects underway and no income to speak of yet, the company needed a cash infusion. So Chris pulled out all the stops and threw a few blowout parties at one of the hottest restaurants in Manhattan's Greenwich Village. An invitation to one of Chris's parties was essential if you were to be considered a player in Silicon Alley, and the parties were chock full of dealers, Wall Street hitters and clients, present and future.
Within two weeks of the networking parties, Chris had commitments for over $2 million in venture capital. In typical Chris Sardoni fashion, he overpromised, pressured his investors to complete their transactions in ridiculously short time spans, and insisted that they not only invest, but also bring the institutions they often did deals with along with them. Late at night, however, after the last party and the last meeting with his first-round investors, Chris wondered how long it would be before all his promises came home to roost.
Soon Chris found himself overwhelmed by his company's lack of organizational structure, constant changes in corporate direction, and outright failures. Two of their last three major projects were out of control technically, and Chris's company hemorrhaged money. The estimates that they had made to their clients, which seemed so grandiose and laden with profit margin at the time, became ball-and-chain projects of undeliverable expectations that weighed down on the already understaffed programming department with numerous corrections, changes and improvements.
Soon enough, Chris needed a second round of financing, as he saw clearly that the money he'd raised in the first round would not last but two more quarters at his current burn rate. Soon after his appearance on MoneyHunt, he met separately with his first-round investors and tried to explain the numerous reversals, blown deadlines and unfulfilled promises, in terms of both the business and its profitability and investor expectations.
Surprisingly, no one was particularly upset at his explanations. As a matter of fact, many of them shrugged them off, ascribing no personal blame to Chris but rather to the vicissitudes of the rapidly changing new media market. But those investors who had heard the promises before and who had been fooled by both the market and by Chris were not at all interested in throwing bad money after good.
With only two months of cash left at his present burn rate, Chris's desperation grew. He fairly jumped at the chance to meet with a new investor who had seen him on MoneyHunt and was interested in doing business.
When the deal progressed more slowly than he would have liked, Chris resorted to the threats that had worked so well for him in the past. "We have 30 days to complete a deal, or I'll be forced to revalue the opportunity based on this booming market," Chris thundered. Immediately, and quite shockingly to Chris, they snapped into action.
To the astonished delight of each of his first-round investors, Chris raised enough money to allow him a second chance at finding the ever-elusive long-term revenue stream, to avert lay-offs for a few months, and to pay his princely salary.
There's an old saying, "If you want something badly enough, you will get it . . . badly enough." The person who wants or needs a deal more than the other person will end up doing the deal on the other guy's terms, as Chris Sardoni shrewdly realized. By promising clients more than his design team could deliver, Chris won important contracts that gave him the operating revenue he needed to hire the extra developers who could get the jobs done. By promising investors a return on investment he knew couldn't be justified by his firm's revenues and profit margins, Chris capitalized on the Internet fever of the time, knowing full well that in a hot market, stocks often rise or fall based on people's perceptions and emotions, with total disregard for the hard numbers that should drive investment decisions. His investors, who were no fools, were willing participants in a con game whose only victim is the next person to buy into the company.
Chris's strategy, while extremely successful, comes at a high price. Even though he's technically a millionaire and has survived two successful rounds of venture financing, he must ask himself every night: "When will the bubble burst? When will people start demanding performance from my company? When will the chickens come home to roost?" While overpromising is sometimes the only way to build a business in a tough market, sooner or later you must live up to those promises. The money that comes from hype is very often a short-term loan--the longer-term financial security a company needs to grow is based on solid performance for customers, investors, employees and other constituencies of a growing company.
The line that separates aggressive marketing from outright fraud is an extremely thin one. As Abraham Lincoln wrote, "You can fool all of the people some of the time; you can fool some of the people all of the time; but you can't fool all of the people all of the time." Sooner or later, someone realizes the emperor is naked, and that's when it all comes undone.
From MoneyHunt: 27 New Rules for Creating and Growing a Breakaway Business by Miles Spencer and Cliff Ennico. Copyright 1999 by MoneyHunt Properties LLC. Reprinted by arrangement with HarperBusiness, a division of HarperCollins.