by Derek Lidow
I am one-for-two as a founder and entrepreneur. I closed my first venture, Table of Contents, after trying to make it work for two years. This was an experiment in whether I knew how to run a business that differed from International Rectifier, the semiconductor company founded by my grandfather and father. I fantasized about creating a retail chain that sold plates, glasses, and other tabletop items. The experiment failed, costing me personally about two million dollars along with another $250,000 from business people I knew who invested with me. I put in the second million after my first million had failed to get our store to profitability.
At the time, I was a semiconductor executive, not a retailer. I didn’t quit my semiconductor job to found Table of Contents and I didn’t run the store. But I was involved as a major investor and an opinionated owner. I did recruit an experienced board of directors and advisors, who thought that our store could be made profitable (though maybe they didn’t have the guts to tell me otherwise). I nonetheless decided to close down Table of Contents after the second million dollars and a change in store management produced only an incremental increase in sales. My thinking at the time was, “I will look stupid to everyone that knows me if I go broke pouring money into a losing business.” In short, I had founded Table of Contents to make me feel happy, not fulfilled.
Entrepreneurs with the foresight to have set up a panel of experienced advisers and counselors can make rational decisions about whether more money will allow an enterprise to turn the corner or not. But nobody can be completely rational when faced with deciding whether to risk financial ruin in order to prolong the chances of finally succeeding—no matter how rational they feel. You need objective help in assessing the actual risk versus potential reward of keeping on or quitting.
To answer the question, “is it the right time to call it quits,” you must ignore immediate emotions and answer a more pertinent question, “How do I want to feel about my life when I’m too old and feeble to work?” Let me explain, using myself and my second startup as an example.
To start iSuppli, I quit my job as CEO of International Rectifier (IR), a global semiconductor company listed on the New York Stock Exchange. At the time, I had more than 4,000 people working for me in nine countries around the world. We were a profitable global leader in our technological niche and I was highly paid and well respected. But I wanted more, and it wasn’t money. I wanted to prove that I could create lots of value on my own, my way.
The fact that IR was a company founded by my father and grandfather over 50 years before was for me both a blessing and a curse. I had not planned to work for IR after I graduated with a PhD in Applied Physics from Stanford. I was interested in lasers, not semiconductors, and I wanted to do what interested me. But when I had been working for about a year for the leading laser company of the era, developing cool new types of lasers, my father said he needed my help to save IR. That’s tough to say no to.
My joining IR was not well received by almost everyone else in the company. I was widely considered a nepotistic interloper, even though my family’s ownership of the company had been diluted to small single digits by the time I came aboard. My way forward involved avoiding many landmines, often deliberately put in my way. But these are stories for another time. Eighteen years later I became CEO with the unanimous vote of the Board of Directors after having led the transformation of multiple parts of the company from producing disappointing results to becoming the best in the world at what they did. Five years after I took the reins, IR was performing better than it ever had, and I felt I had accomplished what I had been asked to do. It was time to start my own venture, my own way. So at age forty-five, I did something few successful public-company CEOs ever do: I left a successful and profitable operation to start a company from scratch.
When I founded iSuppli, I had about as many unfair advantages as any founder could ever have. To begin with, I knew first-hand the problem I wanted to solve: help all electronic companies, IR included, better control their manufacturing and inventories by giving them improved tools and visibility into end-customer demand and the status of all the industry’s supply chains.
As the CEO of IR, I had constantly asked why things couldn’t be more efficient and why we didn’t have all the information we needed to make expensive investment decisions. What I wanted to do was complicated, even relative to the highly technical world of the electronics industry. But this complex industry needed complex solutions to manage the billions of electronic parts that moved around the world every day, and I had some clear ideas about how the industry could save billions of dollars in inventory and distribution costs. My ideas were based on direct experience and best practices, and resonated with the more sophisticated players in the industry. It was my first unfair advantage: the problem was real, and I had a credible solution based on direct, high level, and firsthand experience.
Second, I had broad experience—I had run operations, sales, marketing, R&D projects, and supply chains at one time or another. Since earning my PhD, I had led a large company and I had started divisions from scratch, both close to home and in far-flung places around the world. Having raised over a hundred million dollars on Wall Street, I was financially savvy. And having learned much from my unsuccessful attempt to launch Table of Contents, I was the opposite of naïve.[21]
Third, I knew people and people knew me, and I had a reputation for being ethical, practical, and smart. Important people in the industry—potential customers and capable, experienced employees alike—were willing to take my calls and listen to what I had to say. That’s not to say that everyone simply signed up for iSuppli’s services on my word alone. What I was proposing was expensive and complex. It needed to be carefully evaluated before being adopted and implemented. But getting a hearing was still a huge advantage. And it helped me assemble a Who’s-Who Board of Directors and board of advisors. Within weeks I had recruited an incredibly capable team of individuals widely respected in their areas of expertise. (Many other people were willing to come work for me instantly, but I didn’t recruit from IR, which I loved and didn’t want to harm.)
Finally, I had the unfair advantage of being very well off financially. My twenty-three years in the semiconductor industry had resulted in substantial wealth through stock options. At the time I started iSuppli, I had the financial means of never having to work another day in my life if I so chose. I could send my kids to college; I could take care of relatives; my wife and I could do whatever we wanted; and I could personally invest to get iSuppli launched.
Nevertheless, I did ask some venture capitalists, some of whom were strangers, to invest in iSuppli and be my partners. Why? I thought I could remain in control because I thought I would have the funds to retain majority ownership. I reasoned that I could use “other people’s money” to grow faster than any potential competitor who might copy my ideas.
iSuppli did have competition. We were solving a big, costly problem and it was the middle of the dot-com bubble, so there was ample money available to fund other people attempting similar solutions. There were plenty of smart, credible people in the semiconductor industry, and the list of potential competitors was long. My solution hinged on iSuppli building out a global supply chain faster than anyone else, which convinced me that I needed to take the high-risk route with strong financial backing at the outset.
But, as is true for just about all entrepreneurs, things didn’t work out exactly as planned. For despite the many advantages with which I had begun, key advisors and investors suggested on four different occasions that I shut down iSuppli. But, as is true for most successful entrepreneurs, I felt that I wouldn’t be able to live with myself if I failed.
The first time I was advised to throw in the towel typifies the existential crises most entrepreneurs face early on in the testing out of their business idea. To explain how to make the electronics supply chain more efficient, I made a cute diagram that showed how the two intertwined flows of money and parts could be more effectively sy
nchronized. The diagram saved me explaining a complex concept and it got me plenty of attention. But as often happens when you’re selling a business-to-business concept, the bosses at your potential client company understand your idea, while the people who will have to implement it feel threatened by it, doing whatever they can to make its implementation look impossible. After shaking hands with the Executive VP of our potential first client on a deal to implement our ideas for one year on an experimental basis, we were stymied for weeks. In every implementation meeting we were peppered with objections, showered with alternative interpretations of facts, and treated to many emotional outbursts. I also remember a dismaying, middle-of-the-night phone call from our experienced implementation team leader at our potential client’s factory in the Philippines. “We’ve failed; it can’t work,” he said. “Let’s not waste any more money fitting our round pegs into everyone’s square holes.” There were real technical issues; the problem wasn’t just fear and reticence on the part of the client’s implementation teams. We were afraid we couldn’t deal with all the issues that had been thrown at us. Even the potential customer’s EVP who had liked my ideas was losing patience with us. I thought, “If I fail with iSuppli, everyone will think I’m a bad business person and they will never listen to my ideas again. That just can’t happen.” So I asked myself, “If I had all the money in the world, how would I solve the problems they’ve thrown at us?” I took action by dedicating several full-time people to act as the customer’s ombudsmen. My investors and key executives all said, “That’s going backwards! We can’t afford to do that. We’ll go out of business fast if that’s our new business model.” I thought that it was better to go out of business fast rather than immediately, and I also thought that if things went smoothly with the one-year experiment, we could then withdraw the extra people we needed. The solution placated our customer (who understood our offer was a great deal, because to perform our experiment we were basically subsidizing their business), and we stayed in business, although that client didn’t make us any money until a couple of years later.
The next time I was advised to call it quits came about a year later. We were about to sign a contract to install our systems at the largest division of one of the biggest and most respected electronics companies in the world. They had been thinking along similar lines themselves, and when we showed them what we had up and running, they realized that we were well ahead of them. They knew many members of the senior team I had assembled, and they believed we could deliver them major savings, fast. We needed only the CEO’s signature on the contract. She had been very supportive of our deal until then, and we expected to get the green light any day. Instead, we got shocking news on a phone call from a company representative: The CEO had decided this would be a great business for them to get into, and she had decided to create a new division to copy what we were doing and compete with us. To top it off, we soon heard that she had personally called several of our potential clients and offered them joint venture partnerships, potentially giving her company a huge lead in creating a more efficient global supply chain.
It was as if a bomb had gone off at iSuppli. We felt dazed, injured, and afraid. Several of my investors said, “Game over.” Re-examining our business definitely might have been the logical thing to do at the moment. But my experience at IR in dealing with large companies told me they couldn’t analyze situations as fast as a nimble specialist outfit like iSuppli could, nor could they implement solutions as quickly. Admittedly, I was afraid. But the CEO’s actions just made me even more committed to show the world that nobody could manage the most complex supply chains in the world better than iSuppli. No retreat, no surrender. The shot across our bow just made us even more determined to do a great job building out our capabilities.
Fast forward another twelve months, when iSuppli was starting to find its groove, even though the dot-com bubble had burst and much of the electronics industry was in survival mode. At the time, we had 175 employees and a couple of experimental “demonstration” engagements going with a handful of clients in a few locations around the world. We were moving millions of parts a week. We were a 24/7 global operation. And our sophisticated supply chain management and information gathering processes, which we had exclusively developed, were reducing the volatility of the supply chains we managed.
Our largest, most sophisticated, and highest-profile client declared that they were ready to commit to our platform globally if we would commit to investing in a global buildout. We needed about fifteen million dollars to implement a global infrastructure. But at the end of 2002, after the dot-com debacle, nobody was investing in tech companies. Our investors said they’d figure out how to get us the money we needed, but they would need our client to sign a multi-year contract for our services, with a minimum guaranteed payment that would at least cover our extra costs—our VCs couldn’t raise money for us to lose money. But the client, whose business was under considerable stress just like everyone else’s in the tech world, refused to even consider guarantees. I went back and forth between investors and this client—and our other clients as well—looking for a solution that could secure the money we needed. After three months of this, our client said, “Enough; you’re too financially insecure.” They were going to go with our less sophisticated but better financed competitors. Unable to raise the money to go global, and with the defection of our highest-profile customer, we found our other supply chain management customers abandoning us.
The three months I spent trying to negotiate a solution to the problem of a guarantee also gave me time to think of alternatives. Because Plan A rarely works out as expected, entrepreneurs are strongly encouraged to have Plans B, C, and D at the ready. My Plan B was to focus on all the ways we helped our clients improve their supply chains that did not require the deployment of major global infrastructure. iSuppli had created world-class data collection and information analysis teams who had in turn created unique and valuable data subscription services that our clients did not want to see go away. It was exactly the information I had wanted at IR, information that nobody could yet provide about inventories, capacities, and how many products of which type were being used by which customer. Such information, when combined with iSuppli’s supply chain management software and processes, helped us mange supply chains better than any customer could. This information was something everyone up and down the supply chain wanted. We had worked hard to crack the code on how to get that information legally, without using anybody’s proprietary or confidential information. We had already started selling our data and information independently of our supply chain services while we proved out the other aspects of our business model. Those data and information services represented about one-third of the revenue we were earning at the time of this calamity.
So when I couldn’t find funding, I had a back-up plan ready to shift iSuppli into being a “market intelligence provider” to the electronics world. But it required laying off three-quarters of iSuppli’s employees. I had been up front with all employees throughout the crisis, providing weekly updates on the search for funding and talking candidly with employees who came by my office seeking the latest news. When all was said and done, nobody was surprised by the layoffs. More importantly, not a single person critical to maintaining our data collection and information business lost confidence in iSuppli and left the company—I kept the one-quarter of the team that was critical to the survival of the business.
At that point, the VCs saw iSuppli as a failure. We were allowed to stay in business because we still had money in the bank, but they wanted my head. A considerable fraction of my wealth was tied up in iSuppli, so I was fine with the VCs looking for any CEO who could make the company more valuable than I could. But in the meantime, I wasn’t going to let that search divert me from making our market intelligence business as valuable as possible. I could have stomped off or decided to show the Board who was boss, but choosing someone to lead iSuppli to become more valuable was ultimately in
everyone’s best interests. About six months after the layoffs, the VCs officially called off the search for another CEO. They said that my vision to grow iSuppli’s value as a market intelligence company was more compelling than the vision of any other CEO candidate. Even though my partners didn’t realize it at the time, the third crisis in iSuppli’s life had been averted because I had a solid backup plan.
A fourth existential crisis came as our clients continued downsizing and shrinking budgets for several years after the dot-com bubble burst. Despite the cutbacks, clients wanted us to provide them with ever more data and information. I believed that making our customers happy while growing our business was a great opportunity we couldn’t pass up, lest our customers encourage competitors to deliver to them what we didn’t. The challenge was that about a year was required to develop a new data or information service, and then another six to twelve months for enough customers to check that the accuracy of the data was to their satisfaction, and then to embed the information into their own systems. Only then did our data actually pay off for them. Although our investments in new services started to pay back in eighteen to twenty-four months—a relatively short time to get to cash flow breakeven—our VCs wanted none of it. They had written down their investments in iSuppli after we shut down our supply chain management business, and they were not going to give us any money to expand, even if it offered rapid payback.
During that time, I kept the company growing by loaning iSuppli money from my own savings and forgoing my salary to make it clear to everyone that these loans were entirely for the good of iSuppli. Everyone was happy, at least for a few months, about all the new data we had collected and the services our customers were eager to evaluate. But then my cash reserves dried up suddenly. My old company, IR, started to struggle with their profitability and the price of their stock plummeted, rendering the stock options I still owned worthless. With no ready way to fund the company I found myself in a position I had promised myself to avoid at all costs—needing to find new funds within ninety days to meet payroll. Failing to make payroll totally screws employees—the best of them leave immediately—and causes companies to collapse. If iSuppli collapsed because I ran out of money and missed payroll, I would be considered an incompetent entrepreneur; nobody would ever listen to me again. People outside of IR might even question my past accomplishments there. I couldn’t bear such thoughts. To keep iSuppli running, I was willing to do anything legal that wouldn’t bankrupt my family.
