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SummerFest Tech Pitch Competition

In late June in Milwaukee, Wisconsin there is SummerFest, which is one of the top music festivals in the country. Concurrent to that, on June 23-25th there is a tech festival. As part of that, there is a pitch competition, featuring four different tracks - One of our portfolio companies, Huupe, pitched in the competition several years ago…

Here is the link to apply!

If you apply, reply to this email and let me know! This is an event that is something that I end up attending every year, so would be great to meet you if it works out!

Now onto today’s post!

What Coachability Isn’t 

If you were to ask an investor, “What is one thing that you look for in founders?” You probably won’t wait very long until you hear the words, coachable, or the “coachability of founders.” Coachability is one of the things that investors frequently talk about.

I would say the same thing.

And yet, I would venture to say that most founders would say, “Oh yes, I’m coachable!”

But what is founder coachability? Or maybe better put, what isn’t it?

Over the years as an investor, I’ve seen a fair share of founders who are coachable and not coachable. In today’s post, I’ll take you behind curtain of one such occasion of what coachability doesn’t look like.

At one time, I encountered a startup. Let’s call it ABC Company. The two founders were Sarah and Allen.

When I first encountered them, the company had a pure SaaS play and seemed to identify a white space their market that was unaddressed. The company was still proving out the thesis of why this product will win. Yet, Sarah and Allen were excellent fundraisers. They had raised successfully from individual investors over the course of the company and were expert storytellers and vision casters.

The stage of the company, among other things, was the main reasons that we passed on the company initially. However, we really liked Sarah and Allen a lot. They would always position themselves as desiring feedback and a willingness to act on feedback. Over time, I grew to respect what they brought to the table and have a favorable impression of them.

Checking In With the Progress

A later time after we passed, Sarah and Allen came back and wanted to update me on the progress. Since I appreciated what they brought to the table and wanted to stay in the loop, I was happy to get on a call. We had a good conversation via Zoom, and I followed up with some questions via email. I wanted to further understand some baseline metrics. Things like,

• Can you detail your current employees right now?

• What is the burn rate?

• What is the current financial runway?

When Sarah and Allen responded back with the composition of the team and their roles, I noticed something concerning.

ABC Company had the two founders and then 6-7 employees across sales, marketing, operations, etc. About half were software engineers. All of the employees were full time.

I looked at the revenue and the revenue growth of the company over the last 6-9 months. For all intensive purposes, the revenue at this point in the company was a few thousand dollars a month. Sarah and Allen were able to make it work by continually raising money from investors to fill the cash crunch.

Situations like this is where the value of an investor’s high velocity of inputs across hundreds of companies comes into play.

Two things came to mind:

✅ I had seen other startups where they are hitting the same level of revenue growth over time with half the size of the team.

Furthermore, in what I knew about ABC company and its current execution, they were at a stage where it was largely about sales execution, not product building. ✅

Thus, seeing the founders and the 6-7 full time employees, half of them being engineers, a nagging question hit me. To put it bluntly, “What is going on in the company such that they needed so many full time employees?” So I replied to the email and asked.

Me: “It would be great to know your compensation for each person and percentage of time they spend at the company. You have more staff than what I typically see for a startup at your stage.”

Sarah and Allen came back that they had, say, $25,000 in monthly expenses to pay the team. Clearly it was a situation where employees were making below market wage to work at the company, which was impressive by itself and spoke to Sarah and Allen’s ability to cast the vision of the company.

When they laid out the individuals on their team, two specific individuals caught my attention - a more expensive developer and a more expensive business (non-sales) person. Taking those two off the table would be $10,000 and take the monthly burn down to $15,000.

Toward the end of her email reply, Sarah added,

Sarah: “I understand that we are a bit of a larger team than most at this stage. However, we are looking to execute quickly and beat our competition and our core team is the right team to make it happen. So, we are doing everything we can to keep our foot on the gas.”

✅ I heard Sarah, but there is a balance between speed and survival. In this case, it seemed like they were over-indexing for speed at the expense of too much cash flying out the door. Plus, The market wasn’t moving that quickly such that they needed hyper speed. ✅

So, I decided that ABC Company should offload some employees to lessen their burn. If they did that, here is how I was expecting the next few months would play out. One part practical, one part financial:

On a practical level, those two team members that I highlighted seemed superfluous. I assumed there was some inefficiencies with the team happening, plus perhaps a lot of activity with little being achieved. A smaller team would force them to focus in on the key line of execution.

Financially speaking, if ABC company would reduce the burn rate, it would better accommodate the current growth in monthly revenue. Reducing the burn would allow a shorter time distance to sprint get to cash flow positivity. Getting to cash flow positivity would be a tremendous milestone. It would not only put the company on more solid footing and ease the concerns and morale of the team, which I assumed was waning due to a number of months in this situation. But additionally, it would release the pressure of Sarah and Allen to be continually raising from investors. This would allow both of the founders to double down on customer acquisition.

So, I replied to them:

Me: “I recommend two things specifically- drop [these two hires]. $10,000 gets saved just like that and you've moved from 3 months to 6 months runway.

“The biggest risk you run is losing the trust and credibility with your team if you don't do what needs to be done now and you will never get a second chance. You will win their trust even more if you do what needs to be done for the business and vision.”

Allen responded to my suggestion. 

Allen: “Thanks, Matthew. We’ll take this into great consideration. There are a few more investor deals in the works that if we can get them closed in a timely manner, we’ll let you know. If not, we understand what we need to do.”

I responded to the founders that I appreciated they took my advice well. After leaving this exchange, I was also satisfied that the founding team was continuing to show themselves as coachable, reinforcing them as quality founders in my mind for a future investment opportunity.

An Unexpected Update

A number of months later, Sarah and Allen reached out again to reconnect. Again, I was glad to re-connect and get an update on the status.

We had a call where they laid out the state of play - the revenue growth since last conversation, the adjusted product vision, etc. The monthly recurring revenue had probably doubled since last time we spoke. Then, I asked about the team and the burn rate - my going concern on our previous touch point.

Red flags started to emerge. Red flags that I didn’t expect to hear.

Sarah and Allen still had 6-7 employees, all full time. It turns out that a number of the employees that were on the team at our last conversation had moved on from the company and about half of the team was new.

But dangerously, the burn rate had virtually doubled since last time we spoke to around $50,000.

So revenue had doubled, but the burn had also doubled. That was odd. That math equation didn’t make any sense.

Going into this call, I totally expected the company to be close to cash flow positive. But instead, the danger of the previous situation had been ratcheted up - doubled revenue and doubled burn rate. The company wasn’t gaining any ground - they were on the same treadmill with larger numbers.

And, just like last touch point, the founders were still making the math equation work by raising additional investor capital along the way.

I had this “What is happening here” moment.

✅ I’ve found that when founders are doing something that totally defies wisdom and logic, there are two binary reasons -

1. Either the founders see something that no one else sees, a light at the end of a tunnel, an upcoming inflection point, that is within reach and have to endure temporary pain to get there.

2. Or, they are just executing blindly and have no idea what they are doing. ✅

There typically isn’t any middle ground between the two.

A blunt way to get right to it, “Do the founders actually know what the heck is going on?”

Alarm bells were going off in my head.

I asked Sarah and Allen about the reason behind the still larger-than-necessary team, referencing that we had been down this line of conversation before.

Sarah: “We just have to build out this and this feature set and these additions will activate a tier of customers at a higher revenue number.”

OK, interesting. But I played out the logic of that approach in real time.

Me: “So, I hear what you are saying. But just because you have the feature set doesn’t mean they will automatically become your customers. Typically, investment dollars go to growth. But instead of the investment going to revenue growth, it’s instead going to build product, that you hope will unlock a tier of customers that will buy your product and can provide higher revenue contracts. And, you are trying to do that in a short period of time. But you are building product for a tier of customers that you don’t know for sure will actually buy. That’s very concerning.”

After some more time conversing and me pointedly inquiring about the situation, one of the founders commented, almost as a way to wrap up their final thoughts on the matter:

"Well, that's the life of a startup founder. Taking risks and helping people see the vision."

What?

After I got off the call thought to myself, “That's not the life of a startup founder. That's startup suicide!”

In the same proverbial breath, I was breathing a big sigh of relief. Thankful we didn’t pursue the company and thankful that this lack of coachability had come to light.

Reflections from the Sum of the Interactions

In thinking about this, as I write this, I realized I gave the founders the same advice, twice - over the course of many months.

I gave the recommendation to drastically reduce burn, twice.

I used the phrases in both my earlier email and then call with them, “you will lose the credibility with your team if you don’t fix this,” twice. (That statement had actually played out. A number of the team members on this most recent conversation were new.)

And twice I said, “There may not be a company anymore if you do not act now.”

The founders were living on a razor’s edge. They were trying to continually bring in investment to fund the cash flow crunch.

✅ Frankly, it was a miracle that the company was still around.

But my point in all of this is that the miracle shouldn’t have been needed to begin with. ✅

This was a situation of their own design. They were on the razors edge because they didn’t make the hard decisions in the company to get off the razor’s edge.

There were factors that were outside of Sarah and Allen’s control.

They couldn’t control the growth of revenue month over month and which customers bought when. Totally understandable.

But there were dials that were completely within Sarah and Allen’s control. These dials controlled the fundamental math equation of the company - how much cash is coming in versus how much cash is going out.

I had threw them an external insight - reduce your burn to accommodate your current revenue growth.

I figured that perhaps Sarah and Allen were too close to the action to see it. Then with their response, “We know what we need to do,” I thought that because of all of the other touch points up until that moment - all of my other conversations, desiring feedback along the way, the appearance of coachability, the point was well taken.

But when the situation happened, and they had moved even closer to the razor’s edge, I concluded something different than before.

The feeling of “You didn’t see the dangerous road you were on, thank God you’ll correct it!” now was a feeling of, “You know exactly what road you are on, and that is absolutely terrifying that you are OK with that.”

Closing Thoughts

One part of coachability is acknowledging that voices that are external to your company sometimes have way more insight than you do.

I’ve been on a fair share of 30 minute calls with founders, especially first calls, where I end up saying or suggesting something that the founder has been struggling to understand for months on end, and it’s a lightbulb moment for them.

That’s the value of an external perspective with a high velocity of startup inputs that can make connections across them.

✅ But the other part of coachability is this. You always take in the advice, but you don’t always take the advice.

Coachability is fundamentally about having conviction. ✅

When I share insights with a founder, either in the Tundra Angels portfolio or otherwise, it’s helpful to just shut up and listen to the founders’ response.

With some founders, I’ve disagreed or had a different take on a way that they should be doing something. Sometimes, the founder always has a very clear conviction on why they think the way they think and they get me to understand that. I’m so proud of our Tundra Angels portfolio founders because this how all of them are. They always take in the advice, but they don’t always take it. When they don’t take it, they have so much conviction in a certain plan or path that they can articulate the “why” in a very compelling way.

But then there are some founders out there, such as in the company above, where there isn’t a good reason for a why. In fact, the conviction is completely flawed and baseless.

coachability is having this tension - seeing the value of external voices as well as the need for internal conviction.

coachability isn’t a character quality, as investors seem to indicate when they are asked about what types of founders they invest in.

✅ No, coachability is a process. An ongoing process of work and life that is rooted in a desire to do what is best for the whole, not the person. ✅

In the case of Sarah and Allen, remaining at the razor’s edge unnecessarily was not best for the whole company. It begs the question - who is the CEO running the company for?

Often times, lack of coachability has a time expiration before something breaks.

Because if someone doesn’t take in advice, and just takes their own, it’s just a matter of time until the market or world takes it to them.

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