Most start-ups are doomed to fail, but even the majority of those that succeed invariably face severe hurdles at some point that threaten their very existence. Those that survive need to balance optimism with realism, manage risk, build resilience, and plan how to turn the inevitable crises into opportunities. Vivek Mehra, a company founder, venture capitalist, and start-up expert, shares his insights with McKinsey’s Navin Nagiah.
Key Insight #1: In a start-up, you need to balance optimism with realism—and strategic alignment at the leadership level is critical.
Navin Nagiah: What are some of the most challenging situations for a start-up on the strategic front? What about on the operational front?
Vivek Mehra: On the strategic front, more often than not, the first product or service a start-up launches has to be modified before it succeeds. I’ve found this to be true irrespective of the tests, research, and analysis that may have been done beforehand. This is because when you do something truly innovative, there will always be something you don’t know.
In some sense, the greater the innovation and the bigger the dream, the greater the unknowns. You learn more in the process of doing and can always tweak the product based on the continuous feedback you get from the market. Sometimes the tweaks are manageable, and at other times they are substantial enough to qualify as pivots, which are always tough to execute.
On the operational side, start-ups often take a while to get their execution right, primarily because of founder overoptimism. On the one hand, optimism is necessary to create a company. But on the other hand, that same optimism gets them into trouble by getting in the way of good judgment. Achieving the proper balance between optimism and execution takes one to two business-building cycles. You also need to balance optimism and realism, creativity and execution, as well as vision and grounded practical thinking. You need to have your head in the clouds and keep your feet on the ground at the same time.
Navin Nagiah: What’s the worst-case scenario for a start-up to manage?
Vivek Mehra: The most difficult challenge I’ve witnessed is a conflict between founders. It could be either a personality clash or disagreement around technical direction, product strategy, or risk appetite. And this lack of alignment between founders can easily become toxic and spread across all levels of the organization fairly quickly.
This means the board of directors must decide whom to back and which direction to go in, which is one of the toughest challenges for a company and board to face. Solving these sorts of problems is never easy, both because the decision is very strategic and fundamental to the success of the business, and because your information is incomplete and to a large degree highly subjective.
In addition, given the ownership structure of the founders and investors, there are legal and other complications to deal with. Also, since founders are typically “living the company” every day, it’s a highly emotional issue for them, further complicating the situation.
To overcome this kind of challenge, the board needs to go into an information-gathering mode, soliciting perspectives from unbiased third parties in the organization. Then the board needs to make some hard decisions, and it needs to make them quickly and only once—because there is no second-guessing or going back once they are made. You have to look ahead and move forward.
Another particularly difficult challenge for startups is navigating black-swan events, like the COVID-19 crisis that we are living through right now. I know of a company that was well on the path to profitability, but with the coronavirus event, it went from many millions of dollars a month in revenue to almost zero in less than a few weeks, and it has had to furlough hundreds of employees.
This is something no business or leader could have prepared for, and it impacts the lives of employees, their families, and the investors. It takes not just leadership but incredible strength of character to manage such a seismic shift. But a crisis can also bring opportunities. I know of another company that sells products for children at home, and its business has grown tenfold in the past few weeks.
Key insight #2: Crises are inevitable and sometimes unforeseeable. They are also opportunities.
Navin Nagiah: How does an organization prepare for a crisis? How much does being prepared for a crisis help an organization?
Vivek Mehra: Some types of risks are known or expected risks, such as security breaches and employee or customer lawsuits. Of course, you should do your best to minimize these. However, in anticipation of them happening, the company should have a well-documented escalation plan and protocol for handling them that gets triggered automatically, so that mitigation begins like clockwork.
There are also unknown and unknowable risks that are more akin to black-swan events, which are impossible to prepare for. The COVID-19 situation we are currently in the middle of is one example. A large unexpected single-day stock market drop is another example. While you can’t foresee these in terms of specificity, you should have some basic emergency preparedness in place. It is shocking that even larger companies don’t have it.
The type and magnitude of risk you prepare for depends on what is at stake. The stakes for a company with $10 million in revenues are very different than for a $10 billion company. And for an entire country, the stakes are many orders of magnitude higher.
Navin Nagiah: In your experience, do crises and challenges help an organization become stronger, and if so, how?
Vivek Mehra: Yes, the organization should always do a postmortem to see what worked and what didn’t during the crisis. Conscious, deliberate learning and, to some extent, codification of that learning so it isn’t lost are crucial. This deliberate effort to constantly improve makes the organization stronger.
The other very important thing is to maintain an optimistic frame of mind. While acknowledging the crisis, the CEO should always be aware that a crisis is also an opportunity, and always ask, “How do I use this to strengthen the firm? How can I come out on the other side stronger and better than the competition?”
In some sense, a crisis is almost a natural process of maturation. Each time you run four miles or exercise for an hour, you put yourself through a certain degree of stress, but you end up becoming that much stronger and healthier for it. You have to look at the process of building a company the same way.
Key insight #3: Resilience—a crucial quality for successful businesses—comes from facing crises and learning to come out of them better than you were before.
Navin Nagiah: Based on your experience, what does resilience mean to you, and how important is it to a founder? Can you give us an example where it has made a difference?
Vivek Mehra: Resilience to me means staying on an even keel, not giving up, taking ownership, acting thoughtfully and professionally, inspiring others, and arriving at solutions in a tough environment. This is a vital quality in any founder or CEO. All start-ups go through multiple forms of crises in the process of business building, and whether a major crisis happens in year one or seven, it is bound to happen.
So resilience is a very critical component of leadership. I encourage my CEOs to try to maintain an even temperament. Store some of their excitement when they get good news and use that energy to keep them going when they get bad news. Very much like a dam stores water during a rainy season and releases it during a drought.
One company I remember distinctly exhibited this resilience in spades. First, it had an acquisition offer that went awry, and then fundraising efforts failed. Finally, a debt deal went sour, and it had only a few weeks of cash left. It was a respectable $12 million business, but it was two weeks away from turning out the lights.
In order to save the business, the company raised debt at an effective interest rate of 27 percent and tried to restructure. But a few months into the debt round, the restructuring went haywire. At one point, the company experienced an employee churn of close to 50 percent for six months and was down to only two sales folks.
It went through a tumultuous three years, but through it all, the leadership kept asking, “How can we make the best of it?” It offshored retention sales, concentrated engineering in one location, flattened the organization, and kept innovating its product. The company just kept putting one foot in front of the other, despite how difficult it was. The emotional toll something like this takes on the leadership is high, and in some ways, resilience comes from character.
The company eventually achieved profitability and was acquired. Without that resilience, it could have gone bankrupt at least three different times.
You are not born with resilience. But you acquire it through effort and life experience.
Navin Nagiah: Are there any specific habits and practices that can help an organization build resilience? Or is resilience inborn?
Vivek Mehra: You can take a number of actions to build resilience. Set stretch goals. Allow for nonfatal failures, and emphasize learning from failure. Keep a positive mindset. Talk about resilience and educate the entire organization about it—hopefully before a crisis, but especially when you are in the middle of one.
You are not born with resilience. But you acquire it through effort and life experience. Look at Marine boot camps. Fairly young and raw recruits enter these camps, and after 13 weeks of intense training, they come out very resilient and strong. Resilience is something you can build both within yourself and in your organization.
If you see people you think are naturally resilient, take a moment and ask them about their life experiences or history. You will most likely learn that they became resilient because of very specific experiences.
You can also make resilience a part of your hiring process. I haven’t seen this done often, but there is not a reason you can’t make resilience and grit a part of your interview and hiring criteria. Look for people who have had certain life experiences and come through them. This is especially important for start-ups and continuous-growth companies.
Key insight #4: Overoptimism can lead to overcommitment—and unhappy customers.
Navin Nagiah: How do the lessons you learned as a cofounder translate into your work as a venture capitalist or as the executive managing a portfolio of start-ups?
Vivek Mehra: I’ve found that my firsthand experience in actually building a company, raising capital, hiring employees, building the product, taking it to market, and dealing with expected and unexpected crises puts me in a great position to empathize and relate to the entrepreneur.
As a result, when I say something, the entrepreneur knows it isn’t some theoretical perspective that I read somewhere—it’s based on real-world experience. That helps immensely in cementing my relationship with the CEO during the ups and downs of building a lasting business.
In general, companies are almost always way more optimistic about their idea and its implementation than they should be. This often leads entrepreneurs to commit to deadlines they cannot deliver on, causing them undue personal stress, projects over budget, and unhappy customers.
Daniel Kahneman talks about this in his book Thinking Fast and Slow, in which he describes it as “planning fallacy.” This can easily be avoided by examining how long it took for similar launches and what Kahneman calls taking an “outsider’s view” of the project. Seeking feedback from trusted advisors who have been through similar experiences is also helpful.
Key insight #5: When you start a company, plan realistically for the first and second years.
Navin Nagiah: Looking back on your career, is there anything you wish you had known earlier about preparing for difficult situations?
Vivek Mehra: My first answer is “nothing,” because if I had known all I know now—how hard building a company can be and how low the chances of success are—I probably wouldn’t have started a company in the first place. But it was also one of the most exciting times in my life, and probably the most rewarding, a time I learned the most!
More seriously, in terms of things I would have done differently, I would have done a much more serious job of financial and schedule modeling in the first and second years, because our optimism was very high and we were off by a quarter. I would also make a greater effort to strike a balance between optimism and realism if I were to do it again today