Navigating distress situations: three priorities to help your company survive
By Abdullah Mutawi, Partner
A substantial portion of my time this past year has been spent advising investors and founders on distress situations. Depleting cash reserves, difficulties raising funding at previous valuations, and gaps in leadership have all played a part in creating distress.
In these situations, founders and investors are under a lot of pressure. It's easy to slip into emotive reactions and discussions, leading to defensiveness and value-destructive behaviour. Founders can find it tempting to lie about the reality of the situation to save face, cut corners to preserve capital, and prioritise themselves over what's best for a company – often ultimately resulting in company failure, a zero-sum outcome.
If you're experiencing a distressed situation, based on my observations over the past 12 months I would advise you to focus on the three key principles below to help you get to a positive outcome for everyone.
[ethical behaviour] also correlates directly with your prospects of attracting support from existing investors, cutomers and your team in difficult times. Stakeholders will always find time (and hopefully funds when required) for companies and teams with a strong sense of purpose and unassailable ethical values.
Do what's best for everyone (not just yourself)
If you're a founder in distress, it can be tempting to cut corners, bend the truth, or make decisions that prioritise short-term or personal gain over long-term company success or helping to preserve investor capital. But as a leader, you have a responsibility to behave ethically and to do what's best for all your stakeholders - including investors, employees, customers, and the wider community.
This is not only the right thing to do, but it's also the smart thing to do in the long run. Ethical behaviour builds trust, which is essential for building strong relationships with investors, customers, and other stakeholders. It also correlates directly with your prospects of attracting support from existing investors, customers and your team in difficult times. Stakeholders will always find time (and hopefully funds when required) for companies and teams with a strong sense of purpose and unassailable ethical values.
So what does ethical behaviour look like in a distress situation? It means:
being transparent with investors and other stakeholders about the challenges facing the company
working collaboratively to find solutions that are in everyone's best interests
treating employees with respect and fairness, even if tough decisions need to be made about layoffs or restructuring
being honest and upfront with customers about any issues that may affect them.
What I can tell you from hundreds of data points and observations is that ethical behaviour is not just a matter of doing the right thing, it's also essential for building a sustainable and successful business and maintaining your credibility and reputation so that you can pick yourself up when you fail and do it all over again. Because, as the old cliché tells us, another key trait of successful entrepreneurs is the ability to learn from failure and convert it into future success.
Maintain trust
While navigating legal rights and obligations with precision and skill is important, I've learned that trust plays an indispensable role in determining the outcome for distressed companies. In every single case where trust was eroded between the founder or management team and investors (or even sometimes among investors), the company ended up being shuttered.
Conversely, in almost every case where trust was maintained, key stakeholders stepped up to solve problems and build trust and confidence within and across stakeholder constituencies, leading to successful turnarounds, rescues, and M&A solutions.
Fostering and maintaining trust is key in these situations. Open and transparent communication, active listening, and accountability are all critical in building trust and encouraging collaboration among stakeholders.
A return or preservation of some capital is always going to be better than going to zero. By working together as equal decision-makers, even when they have competing interests, stakeholders can reach mutually beneficial outcomes that preserve value for founders, employees, and investors.
As any skilled negotiator knows, a bilateral negotiation will always be challenging when emotions are at play. Multilateral negotiations take this to a completely different level where the combination of a smart game theory approach and Socratic advocacy are crucial in influencing a positive outcome.
Trust, as the prevailing theme, takes on an even more important role and the difference between success and failure can be found in working to achieve a Nash Equilibrium versus the adoption of Dominance Theory or Zero-Sum Game approach.
Assess whether you have the right leader in place
It can be an uncomfortable moment when, in a distressed situation, the question needs to be asked. Is the current CEO still the right person for the job?
As an investor and as a trusted counsel to founders and investors, I've found myself in this situation many times now, where I want to say it but wait for someone with more skin in the game to do the right thing - and they never do.
Start-up needs evolve over time, and the right person to lead the company on 'day one' won't always be the right person to lead it during its growth, or indeed, during periods of adversity.
So, when should founders consider hiring an external CEO? Below are some of the key aspects that often factor into this decision.
Self-awareness
Founders must recognise their strengths and weaknesses. If their skills don't align with the company's current needs, it's time to consider an external CEO. A CEO with proven experience of navigating serious adversity is going to be a great asset to a company in more difficult times.
Scaling the business
As a start-up grows, the complexity of operations increases, requiring experienced leadership to navigate new challenges. If you don't have experience leading, it might be time to hire someone who does.
Investor pressure
Sometimes, investors may request a change in leadership to ensure their investment is in capable hands, particularly during critical growth phases.
Founder burnout
Building a start-up can be a gruelling process, and founders may require a break or want to pursue other opportunities. Distress situations can be especially hard on founders, with complex emotions in play, and hiring someone external can often reduce the likelihood of personal feelings affecting positive outcomes.
Diverse expertise
An external CEO can bring fresh perspectives, new ideas, and a wealth of experience to help start-ups reach new heights.
