Hostage Extraction and Turnaround

By Steve Kropper

A Boston fund dispatched me to diagnose a venture that burned through three rounds of capital.  Then they asked me to fix it.

Held Hostage - For four years the founder kept the fund at bay, threatening to take his marbles and go home. The fund feared losing its investment and felt hostage to the founder’s industry visibility and control of a key vendor. So – how to end the hostage situation?

 February – Due Diligence - It took a week on-site to interview the staff, visit customers, test the product, and shadow the founder. My due diligence reported a healthy sales pipeline, dispirited employees, an exhausted founder, and no systems to track cash, invoices, inventory, software development, or customers.  Founder reputation was largely moot as industry procurement was now based on merit.

I endorsed additional investment if the founder ceded control.

Next, I was installed as president, and named in the incorporation papers to ensure the founder’s cooperation. My plan was to stabilize the venture then replace myself with a permanent leader. News media often portray turnarounds as heavy-handed – a slash and burn invasion by the new sheriff. That isn’t always necessary.

I interviewed all staff, believing they knew the business best. They eagerly responded to coaching, support, and interest in their performance. I promoted two hidden gems from part-time to full?time. One, a savvy potential CFO-level player in the role of bookkeeper. The other, a potential operations director serving as project manager. Four of the founder’s family were on the payroll.

I was wrong about systems. Project management tools were available, but the “visionary” founder discouraged use. Dormant systems were revived and refined.  I backed up the new operations director about a daily team call to fix the backlog of unhappy customers.

March – NewCo and Recap - Meanwhile, the fund assembled a legal and financial team to complete an ABC that shed creditors and legacy shareholders, allowing for recapitalization. An ABC is a hellish and meticulous process, but it delivers a new clean company with a cost that can reach a half million dollars. The fund committed capital to new growth. Onward and upward!

April – Hostages Freed - My six-month hostage extraction plan:

1) Transition control of the key overseas vendor

2) Migrate knowhow to the new ops director

3) Push PR to establish the NewCo brand

The plan tied cash infusions to milestones for clearing the backlog of unhappy customers plus reports on other key metrics. The founder has a rare chance for a new start.

Kropper ran biz dev as Parallel Wireless grew from 5 to 400 employees.  He founded WindPole Ventures and Domania.com.