Published in UT San Diego, November 10, 2014
If you put 100 chief executives in a room and asked them “What is the biggest mistake you have made?” I believe that 99 of them would answer, “I waited too long.”
This truth is inviolable. It is a proven statistic. And it saddens me, because “clock management,” whether on the football field or in the boardroom, matters a great deal. Running out of time is the sin most closely related to running out of money.
Maybe they waited too long to hire, to fire, to kill a product, to launch a product — it doesn’t matter — they waited too long.
A CEO I know well comes to see me. He needs money, cannot meet payroll and would like an investment — in a week. He knows and I know that is not going to happen. But I wonder why it took so long to come and see me.
Another company comes to see me. They need a $2.5 million bridge loan for 90 days, and they think they can arrange a management buyout during that time (which is probably unrealistic). The venture capitalists will not put in any more money, and the company will run out of money in two weeks. How does it come to this? Here is the handwriting on the wall. One of the venture capitalists in the deal had not been to a board meeting in 18 months. If you want money in two weeks, then the crush-cram-down is coming. So, the benefit the CEO wants, which is to salvage his company, is effectively taken away by the cost of the money he is seeking.
And then he wonders why the money is vulture money. It is vulture money because you waited too long to go looking for it, and let’s be honest, that investor is not your Uncle Harry, he is not your friend. To quote from “The Godfather,” “It’s not personal, Sonny, it’s strictly business.”
This story can be told and retold in a myriad ways. So why is it so hard to see down the road. To explore this issue, we turn once again to my favorite Nobel Prize winner, Dan Kahneman for his work with Amos Tversky on “prospect theory.”
Kahneman’s study focuses on behavioral economics. He proves that people are risk-averse when facing gains and risk-seeking when facing losses. This finding is in direct contradiction to traditional economic theory that posits that people will always behave rationally and pick the optimum solution when facing a gain or a loss.
When it comes to raising money for the company, the reason entrepreneurs wait too long is that they fear dilution, they fear loss of control, they fear embarrassment, they fear regret and they fear the price to be paid for salvation. Recently, a man came to us and admitted his company was dead meat, and asked if we would buy it in an asset sale. We say yes, and want the CEO to come with it. We talk to one of the venture capitalists who backed the company originally. He tells us that he would not sell for less than $10 million, and they are going to put in more money. In other words, he tells us to drop dead. One month later, the company closed. I guess he showed us who’s boss. The VC has pride, and he also has the pleasure of losing other people’s money.
People consider losses twice as painful as gains, but having to acknowledge the loss, to actually take the loss, to have to lower your expectations and hopes and dreams — well, people do not like to do that — and they wait too long. Kahneman says, “that is why in the stock market, most people sell their winners and hold on to their losers. They want to believe that they will come back.”
I will add one equally important corollary to the “don’t wait too long” theory. That is “do not leave a mess.” Do not run the company to zero and not make the final payroll. There is personal liability in that scenario. Do not leave creditors with nothing. Before the final bell, offer a settlement and act honorably. The wheel is always spinning. You will meet them again. Just like your mother said, “Do the dishes and clean up your room, Johnnie.” And what is fascinating is that studies show that we believe these errors in thinking only affect other people, not us.