S6 E13 Advice from business’s best thought leaders made easy to understand and practical to implement - Jeremy Gray

Season 6 Show 13
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Advice from business’s best thought leaders made easy to understand and practical to implement

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The end of another season. During season 6 I have reviewed articles from some of the leading business publications and delved into some case studies of businesses that did not succeed. As the season progressed I found more and more that I was referencing back to earlier episodes and a pattern of the most common causes of failure was beginning to emerge.

Firms that went under usually had at least three or more of the following characteristics.

• They scaled up too fast
• They entered an industry which was new to them
• They changed their business model too often
• Their systems were not suited for their growing business.
• They hired the wrong people
• They continued down the path towards failure, even when the writing was on the wall.
• They ran out of money
  

In today’s show I will look back at an article and a case study that are excellent examples of these failings.

As you embark on your entrepreneurial adventure or adjust your business strategy, take the time to learn from the failures of others. To misquote Eleanor Roosevelt, “Learn from the mistakes of others, you will not be in business long enough to make them all yourself.”

Why Do So Many Strategies Fail? By David J Collins an adjunct professor of business administration at Harvard Business School.

This is an excellent article that looks at strategy from both the perspective of the disruptor start up and also the incumbent needing to defend its business as it faces new competitors.

You will have heard stories of young ventures who raise millions of dollars, attract tens of millions of customers, achieve lofty market valuations only to collapse when they cannot figure out how to turn a profit or hold off competitors. WeWork might be considered an example of this type of failure. Certainly, WeWork created a hype that was sold to experienced investors such as Japan’s Softbank. But the barriers to entry for this business model are low. You or I could rent a building, put in high-speed Wi-Fi, add some recreational facilities and a beer tap and hey presto we are a competitor to WeWork.

Mr. Collins believes that failures occur because the CEO’s approach to strategy does not take in all the aspects of the business. The article mentions two different types of mistakes. The CEO identifies ways to generate value by addressing unmet customer needs, yet does not understand what it takes to capture a sufficient portion of that value for themselves. Getting your pricing strategy right is vital.  Many start ups take a loss leader position to gain customers and establish themselves in the market. This is acceptable if you have a clear strategy of how you will transition to a pricing model that will deliver you enough profit to grow your business and deliver an adequate return. WeWork did not succeed in this aspect. In contrast, in Asia Grab which is the Uber/Lyft of ASEAN has managed to get this right. When Grab started its car hailing service, I was getting rides for as low as S$2, about a USD1.50.  I knew this was clearly unprofitable for Grab, but they gained my loyalty. Those $2.00 fares are a distant memory and I now pay an economic rate for my rides. Sometimes when the bars empty in Singapore at the covid mandated 10:30 PM closing I pay a significant premium but I accept this as part of the price of having a reliable car hailing service whenever I want to go somewhere. If you are going to start with a loss leader pricing strategy, make sure you know how you will pivot to a profitable pricing strategy without losing your customer base.

The other mistake that start ups make that Mr Collins identifies is that the company gets seduced by the initial success and fails to invest in the capabilities needed to sustain long term competitive advantages. In the excitement of a business startup it is hard to step back and think about the longer-term business strategy. Success builds confirmation bias, what is working now will always work but customers’ needs and expectations change and mature. Jawbone the bluetooth headset manufacturer might be seen as an example of this type of failure. In its heyday its Jambox product line was known as America’s favorite bluetooth speaker. But a pivot towards health tracking without enough care being taken about product quality led to its downfall. This is despite Jawbone having attracted nearly US$1 billion in funding. As they say, hardware is hard to get right.

Chasing too many opportunities or continually changing direction can undermine the ability for companies to develop the organizational capabilities needed for success in the long term. The article cites the example of Nasty Girl, an early mover in online fashion retailing that went bankrupt after it pursued too many expansion efforts. This overstretched the organization's capability which combined with a lack of effective management led to customers looking elsewhere for their fashion items. Launching initiatives without thinking through the resources required is a mistake that management of companies large and small often make. Somehow the CEO or senior manager think because they decide on a new initiative the organization will have the ability to follow through using existing resources.

Let’s look at a case study example of this type of failure, The company concerned was called Baroo, a pet care provider founded by Lindsay Hyde in 2014. Apparently a baroo is the movement a dog makes when he tilts his head inquisitively in response to a human’s voice. I think there is more to the story of Baroo than being lured into poor decisions by false positives. Listen to their journey and see what you think.

Ms Hyde’s original idea was a pet daycare in an office setting. She conducted research and found that demand from office workers would be limited. Her minimum viable product test of 25 Harvard University employees no one was willing to pay $20 for a day of pet care at work. While owners thought it would be fun to see their pets during the day, it was a hassle to bring them to work. It was easier to leave the dog or cat at home and arrange for a pet carer to visit during the day. I do wonder if the sample may have skewed the result. Only sampling folks working in an academic institution may not have been representative of the US working population as a whole. For example, Harvard University is in the center of Cambridge MA where parking is difficult so many folks take the T to work. Taking a pet to work via public transport is certainly a hassle, but if you are able to drive to work, taking Fido the dog along is not such a challenge. When conducting research, it is important to cover as many types of potential customers as possible.

This led to the idea of providing pet care close to home in the underutilized space in basements of apartment buildings. Residential property managers were interested, as such a service would make their properties more appealing to potential tenants with pets. Research showed that 80% of pet owners interviewed were not satisfied with their dog walkers and a similar percentage said they would use a pet day care in their building.

Hyde recruited a cofounder who had worked with her in the past and raised $1.2M and with her cofounder launched her business at a newly converted 315 unit luxury apartment building in the South End of Boston. Hyde planned to start small and use in house profits to fund expansion. She wished to avoid being pressured for hypergrowth for VCs. Her original backers were angel investors who would be happy with solid returns with moderate risk.

Baroo offered a range of high touch services such as dog walking, grooming, feeding, in-house sitting. Owners could book services using text, email, phone or an off the shelf scheduling app. Baroo’s care providers kept in touch with the pet owners using the same channels. Unlike other pet care services who hired their staff as contract workers, Baroo decided their staff would be employees, mostly part time. It was hoped that this would reduce staff turnover, reduce training costs, and allow consistent processes and standards. Baroo’s workforce would be professional, their backgrounds checked and wear uniforms. The cost of bringing a new staff member on board was around $500. And as their staff were employees they had to be paid whether there was work for them or not. Baroo’s competitors only paid their contractors for work done.

Rather than traditional paid marketing, Baroo relied on support from building apartment partners and word of mouth referrals. Building would distribute a gift from Baroo such as a chew toy to new residents who owned a pet. Building concierge staff would recommend Baroo and in return the building owners received a percentage of the revenue Baroo earned from their residents.

At their launch location 60% of residents owned a pet and an impressive 70% of them used Baroo’s services. Lindsay Hyde was delighted at this adoption rate. She anticipated that a similar adoption rate would be achieved at other locations. Ms Hyde fell victim to the false positive effect; early successes which appear more promising than they really are. The danger of false positives is that they can lead to expansion on a level that is not warranted.

What led to this false positive? In Baroo’s case there were three factors. Firstly because the initial location was new, 100% of the apartments had been filled at the same time. The new residents did not have a preferred pet care service provider, so they faced no switching costs by adopting Baroo. The second and this is unusual, the many of the new occupants were members of a Hollywood production crew in Boston to shoot a film. The had brought their pets, had no time to care for them and had generous per diems which meant they had plenty of cash to pay for Baroo’s services. Finally, as Baroo launched Boston had record breaking snow fall, a little over 2 meters, 8 feet in 30 days. As a result no one want to walk their dog, so they would be called out several times a day by the same household. Looking back Ms. Hyde realized instead of understanding this was a false positive, Baroo took it as a sign that if they could operate in these conditions, they could do anything.

Business boomed for Baroo and word got around about Boston’s new pet service. The leasing team at the original block told their counterparts, the residents told their neighbors. Baroo was flooded with requests for their services and quickly signed up four new buildings. Their original plan to avoid VC and rapid expansion were set aside. The original angel investors who sat on the board decided to expand into a second city, Chicago. They grew quickly in Chicago and eventually served 25 apartment buildings in downtown Chicago. A challenge of the expansion into Chicago was to find the right General Manager.  The first GM was a property management veteran but was a poor fit with the start ups culture.

A year after starting in Chicago Baroo raised an additional $2.25 Million in capital from new angel investors and small VC funds and launched in Washington DC.  Washington DC delivered some surprises, and not of the good kind. Customer losses spiked when a change in administration, Trump replaced Obama, and many employees appointed by Obama left town. Apartment buildings were more spread out in DC than Boston or Chicago which added to travel time between jobs for Baroo’s employees.

Managing three geographically diverse locations stretched the team to the limit. Despite this Baroo expanded into New York City, raising another $1 Million.

By now the expansion was delivering some major growing pains. The personalized service that was such a hit with early customers was getting difficult to deliver. Pet owner’s could no longer request their favorite walker, or phone with a last-minute request. Systems such as the off the shelf scheduling app could not keep up. The decision to hire care providers as employees created problems. It skewed incentives, an employee could spend more time doing a fun job, such as playing with a cute puppy and then run late on other jobs, or even miss the last job of the day.

The rapid growth made it difficult to hire enough carers, made more difficult by a 120% turnover rate. Good employees were being stretched, working 12 hour days. Baroo was burning out its employees and burning through their cash.

The financials were not great, in the first six months of 2017 Baroo had revenues of $600,000 and operating losses of $800,000. It was not clear how long it would take Baroo to reach breakeven. It was decision time, sell the company or go for the Series A funding. Ms Hyde pitched VC firms, but none were interested. So, with 3 months cash remaining potential merger partners were approached. Three companies made offers but each deal unraveled. In February 2018 Baroo was shut down.

It is clear that early success in Boston, success based to some extent on luck, building tenants on allowances and freak weather, led to an affirmation bias, we got it right. This encouraged the team to abandon their original plan of growing slowly using in house earnings and instead to accelerate growth. The false start syndrome identified by Professor Eisenmann.

As business people we tend to spend a lot of time analyzing the bad so we can correct it. And less time examining the good. If something is good take the time to understand why, you may find it is not real, or on the other hand you might identify an opportunity you can build on. If you are seeing great growth ask yourself is it by strategy? Or is it by luck?

But was the Boston experience really a false start? Recall they had good success in their first expansion target Chicago, and it seems they managed that expansion without raising additional capital. So maybe the mistake was abandoning their plan to grow using profits generated by operations? Taking the additional funding increased the expectations of the investors. And these increased expectations put pressure on the founders.

The rapid expansion put great strains on the startup team. In my opinion they had two choices, admit they were out of their depth and hire more experienced talent. It is hard to admit to yourself that you are not up to the task in hand. Your ego gets in the way, it is not uncommon for businesses to go under because they grew too big for the founders to manage effectively. The other choice was to retrench the business, maybe shut down the New York and Washington operations, regroup and start again. Again, it’s hard to accept you have taken on more than you can manage. If I only work harder I can get through this, there must be away if I solve this problem.

Neither of these options are palatable but they would have been better than having to close the business.

When planning the business the founders intended to grow slowly. Not only would this avoid the need to raise money, it would have given them time to learn the skills needed to run a larger organization, time to identify gaps in their knowledge and hire folks who could fill those gaps. As entrepreneurs we have to have a certain confidence, you cannot start a business without confidence. But please do recognize your own limitations. You do not need to admit them to others, you can always say I do not have the time to manage, say, operations and hire an ops manager.

The business also seems to have abandoned its operating philosophy, the philosophy which had brought it success, the philosophy that gave them a level of differentiation. In its early days customers were able to schedule their favorite dog walker and Baroo was able to accommodate one off requests. They could provide added value services such as pet parties. All this became near impossible as the business grew, and their technology could not keep up. This type of failure is insidious because it creeps up on you. You make a one off substitution sending an alternative carer because of extenuating circumstances. That makes the next substitution easier. And soon your commitment to your customer that they will be able to schedule their favorite walker is abandoned.

The decision to expand rapidly was solely in the hands of the founders and their backers. Lured by early successes they made the wrong decisions and lost their company. Was it the false start in Boston that led to this outcome? I am not sure, although I am sure it played a part. What do you think? You can always let me know your thoughts via the links on my show notes.

 You can contact me via the following links:
mailto:jeremy@business-in-asia.org

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My websites include:
https://business-in-asia.org/
https://thedentistscfo.com/

My LinkedIn URL
https://www.linkedin.com/in/jeremy-gray1