Photo courtesy Eric Ashman
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We recently had the opportunity to meet Eric Ashman, former president and chief operating officer of Group Nine Media, one of the world’s largest digital media companies, former chief financial officer of the Huffington Post and most recently chairman from the clothing brand DTC MMLaFleur. .
Eric Ashman recently launched a management consulting firm, whose goal is to help business-backed founders through tough times.
Here are excerpts from that conversation with Eric Ashman. The comment has been edited for content and clarity.
“Once you’ve created a product that people want to buy and started selling it to them, many startups make the big mistake of rushing to accelerate growth and raise capital. But if you scale too quickly, you’ll spend more time hiring than executing. You may have a slew of products, sales channels, marketing channels, and technology efforts, but all of a sudden it’s hard to tell which ones are worthwhile.
You are spending more than ever, but the return on your investments may decline. While this is common among VC-backed startups, it’s imperative to weed out unproductive efforts and refocus on your product market fit before you run out of money and time.
Prepare for a difficult change
As a founder, one of the toughest challenges you will face is restructuring. You’re no longer hiring, growing, and saying “yes” to projects; instead, you lay off, cancel projects, and slow your pace.
Rather than wallow in the turn your startup has taken, now is the time to be strong for your team and lead them back on a path that can lead to success.
This is also the time to create high, mid, and low predictions, and base all decisions on your low predictions. Determine exactly how long you have until you run out of money. This is an important reality that you need to be aware of.
Focus on what you can still accomplish, rather than what will be lost. If you stand up and fight for your business, you can always achieve what you set out to do; if you do nothing, you will inevitably lose everything.
What you should not do
Don’t cut your staff bit by bit. When making your layoffs, be aggressive. Cut more than you would like in the first round, as additional rounds in the near future will kill staff morale. Your best people need to be able to work with the certainty that they won’t be on the chopping block from one week to the next.
Don’t cut costs equally across all areas. This creates panic and teams that are already exhausted now find themselves with a smaller budget but the same plan to execute. Be selective about where to cut costs based on department performance.
What to do
It’s time to figure out which of your initiatives have the most potential and focus on those. Do less, but do it better.
Here is where you will need to cut:
Some products: Identify the products that have the lowest sales, the lowest margins and the highest return and cancellation rates, and prepare to reduce them.
Marketing: Determine which marketing channels produce the least results and reduce expenses.
Sales: Take a look at each sales channel and decide which ones are worth pursuing.
Technology: Minimize technology efforts to those that support short-term goals. No more favorite projects.
Three pitfalls to watch out for
Once you’ve agreed to cut costs, you can fall into one of three dangerous traps:
Sunk cost error: When you think of all the time and money that you have already invested in an initiative, you will be tempted to continue to devote time and money to it, even if it does not succeed. Do not fall into the trap ; the only thing that matters is how you invest future time and money.
20-60-20 rule: 20% of your initiatives are failures, and 20% are obvious successes on which everyone can agree. But it’s the middle 60% that will spell disaster for your startup. These are the initiatives that have strong support but no return on investment to sustain them. You will have to make tough decisions about reducing that 60%.
Paralysis of analysis: Don’t fall into the trap of waiting for more data to make a decision on the 60% poor initiatives. This data will take far too long to accumulate if it can be acquired. It’s time to lead your team based on the data currently available: no more, no less. Don’t let your senior team stagnate asking for data that doesn’t exist.
When restructuring, timing is everything. Your team will understand what’s going on very quickly, and it’s up to you to work quickly and efficiently to stay on top of what’s going on.
As you collect data, develop a plan with your management team, and create a timeline for restructuring, employees will recognize any unusual activity. Any disagreements over restructuring will disrupt the workflow and should be kept secret.
Be the leader your team needs
Restructuring doesn’t mean your startup has failed; it means you are creating an opportunity to succeed. Depending on how effective your leadership is, your startup can become stronger and more systematic than it started out.
Keep your team motivated and learn from your mistakes. Do not hesitate to make difficult decisions. Identify the things you do best and prioritize those initiatives. Stay focused on achieving your vision.
We would like to thank Eric Ashman for sharing his ideas and practical advice with our readers. For more information, visit its website and subscribe to the Pivot to Profitability newsletter.