Getting run over
— even on the right track

By Carter Caldwell, Principal, Cross Atlantic Capital Partners

Carter Caldwell

Will Rogers once said, “Even if you’re on the right track, you’ll get run over if you just sit there.”

From an investor’s perspective, that is 100% applicable when evaluating potential investments and entrepreneurs.

A company can have a fantastic idea, solid product, established customer base, good management team and everything can appear to be on the right track. However, a precipitous event could make the difference between getting run over or staying ahead of the curve.

When a company achieves some level of success, complacency can set in and this can be more of a recipe for disaster than anything else. When pitching to an investor, it is critical to show that you are the type of entrepreneur who doesn’t get too comfortable, and instead, continues to innovate, prepares for the unexpected and eliminates stagnancy.

Aran Technologies

In January 2001, Cross Atlantic Capital Partners made a sizeable investment in Aran Technologies. The company had a mobile network management software for dynamically diagnosing the performance of 3G networks, capturing data from the network, and analyzing and reconfiguring the network automatically. At the time of the investment, Aran had a hefty gross profit, a solid management team and clear customer acceptance — one of its customers was Vodafone Group.

With hindsight being 20/20, Aran was on the right track by anticipating that 3G was going to be a profitable and expanding market, however they were too early. Since then, Mount Everest has been wired with 3G service so that at 17,388 feet you can send a text to your boss letting him know that you’ve got an appointment and won’t be into the office that day.

Given that 3G networks were slow to evolve between 2001 and 2003, coupled with the incredible attrition in the telecom sector during this time, Aran’s revenue was nowhere near its forecasts. It had to choose between closing or dramatically changing its direction, which, as you could imagine, would require a sizeable amount of money — money the company did not have. But what outside investor is going to invest in a company on the brink of implosion?

The CEO and Co-founder, Brendan McDonagh previously had been successful when encountering this situation. He was responsible for the successful repositioning of a 400-person division of Ericsson as the leading center of Radio Network expertise within the company. Leveraging this experience when Aran encountered its tenuous state, he met with one of Aran’s largest customers, Vodafone, discussed the situation and indicated that he may need to close the company. Consulting with Aran’s largest customer was probably the smartest move he could have made, because out of that conversation, came the outline for a new product and one which the rest of the market would have a need for. This need was for a Customer Experience Management solution for wireless operators. This product facilitated operators’ ability to manage and understand their customers by continually capturing and managing invaluable knowledge about all customers’ Quality of Service experience.

Raising capital near implosion

Of course, the company needed additional capital, but given the tenuous position in which it found itself, it could only come from existing investors at a price that motivated all parties to rise to the challenge at hand. Armed with this capital, the commitment of its largest customer, and a new vision, Aran was able to change direction to a company that was later acquired for a substantial sum — thereby creating a significant return for investors, management and employees.

Ning

Company direction is something that every company — small or large, old or new, product or service, must be keenly aware of. Ning, a social media company launched in 2004, provided a free service to consumers. However, at the end of October 2010, it abandoned its original business model and completely changed direction. Now it charges for a different service and is targeting businesses. This was a gutsy move — 80% of its previous customers left the company. Since then, revenue is up 400% year over year and it expects to be in the black for the first time in Q1 of next year.

Myspace

At the beginning of 2009, Myspace was clearly the market leader; it had music, videos, local partnerships, mobile integration, millions of bands, four times as many users, the marketing sway of the FOX media empire, 22 international offices and $900 million in cash from Google.

As Alex Wain, a former Myspace employee wrote about Myspace, “They thought they were untouchable and in the process, stopped innovating and started stagnating instead.” By resting on its laurels, it became apparent that Myspace couldn’t stay ahead of the curve; the company began copying the offerings of those driving the market’s growth. Copying others’ offerings only shows that you’ve become the market laggard. Myspace is a clear example of a company not recognizing the need to change direction, and as a result, losing its position as the market leader.

Learning from mistakes

From an investor’s perspective, showing that you have been vigilant in monitoring and adjusting your company’s direction to accommodate market trends and that you have had to address such a situation, shows your management ability. Many companies that are raising money try to paint the picture that everything has been perfect in its growth and decisions; but that is rarely the case. An investor is going to be impressed by how your company, product and management has achieved success, but also will respect you when you show some of the mistakes that were made along the way and how those mistakes influenced the successful path you have taken.

The ability to apply lessons learned from mistakes to guide a company’s ongoing direction is one of the most respected skills an entrepreneur can have and is also something that an investor is going to place a great deal of value on.

Carter Caldwell is a Principal at Cross Atlantic Capital Partners, an international venture capital firm that has delivered top-quartile results and is focused on investing in innovative technology and technology-enabled services companies. With four funds and $500 million under management, Cross Atlantic is closely engaged with an extensive network of resources to nurture and grow its portfolio companies and provide superior returns to its investors. For more information, visit www.xacp.com.

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