Getting Lean and Mean in a Hurry
There you are, making great strides toward profitability as head of a 2-year-old company with a hot new technology. Then the unfathomable happens on September 11, and you're stopped midstride. Revenues drop 70% in a month.
That's what happened to Ed Andrew, president and CEO of DriveCam Video Systems in San Diego. Sales of its technology, which measures vehicle motion and incorporates a camera and microphone to give drivers feedback on erratic moves, were brisk among companies with large vehicle fleets, including Time Warner Cable and Cloud Nine airport-shuttle service. Andrew describes the DriveCam as the auto equivalent of an airplane's black box.
Through angel investors, the company got $1 million in seed funding in late 1999. Sales started in January, 2000, and shortly afterward he raised $2.4 million from venture capitalists, the lead investor being local VC Chopra Fund I.
"FROZEN IN TIME."
"We were right at break even," says Andrew, who expected DriveCam to be profitable by November. "We could then start going out to the VC community and say that, in less than two years, we've gotten to profitability. We could ask for money to grow the company faster. We would be a late-stage, growing, profitable company," he says, describing the scenario that faded to black on September 11. Suddenly, companies that shuttled tourists to and from airports had bigger worries than driver training. And businesses that had placed orders and were on the installation schedule simply canceled.
"It's like people are frozen in time -- they don't want to spend money," says Andrew. "Candidly, I think it's going to be very difficult for us to go to a VC and say: 'Look, we almost got to profitability, so invest in us.'"
With new VC investment unlikely, Andrew had to turn his profitability timetable into a six-month survival plan. If revenues continued to slump by 70%, DriveCam would have run out of money by January if the budget hadn't been torn apart. To draw up his survival blueprint, Andrew asked himself: Assuming revenues remain this low for six months, how can DriveCam stay in business?
THE CUT LIST.
"I went through various scenarios to reduce expenses, and kept cutting [them] so that, at the end of March, the doors would still be open, the lights would be on, and we would have money in the bank," he says. Here's what it took:
* Laying off four employees, reducing the staff to 14.
* Meeting with a supplier who had forced DriveCam to accept $25,000 worth of components on a non-cancelable, non-refundable order. "We got hardball with them about taking the components back," says Andrew, whose threat to never buy from that supplier again persuaded the company to let DriveCam return the order.
* Suspending some Internet services.
* Postponing the hiring of a regional sales manager for New York.
* Cutting back on the work the company had given to a patent consultant.
* Stretching out the timetable for releasing software upgrades and cutting expenses for research.
* Negotiating with an outside consultant, who agreed to take 50% of his fee in stock rather than cash.
* Canceling some equipment purchases.
* Canceling outside sales and marketing plans and setting a strict monthly budget for its public-relations consultant.
* Negotiating with a creditor, who agreed to take a note for the $20,000 owed by DriveCam.
On the sales side, the company switched its priorities. As long as the tourism industry is reeling, DriveCam's No.1 target customer could no longer be passenger-carrying vehicle fleets. Now, it's focusing on ambulances and security vehicles. Andrew understands his is not the only company hurting, so he is agreeing to customers' requests for a cut in the monthly rate.
Although he has little hope of attracting new investors for now, Andrew is optimistic that his current investors will dig deeper, if necessary (For a look at the VC climate, see Some VCs Fear to Tread) (See BW Online, 10/15/2001, "The New VC Style: Deep Pockets, Short Arms") "Altogether, people have invested $3.4 million in the company. I'm hopeful they will be more open and understanding with what has happened to us," he says.
Andrew's experience as a former partner in Ernst & Young and as the former head of another startup that went public helped him manage, nearly overnight, the budget cutting and negotiating. "It's not like I'm a 30-year-old who hasn't done this before," Andrew says. Still, he acknowledges, no amount of business experience could have prepared him for the current climate of war and impending recession.
"There are so many unknowns, it's very difficult to plan," he says. But, as he demonstrated at DriveCam, it's not impossible.
By Theresa Forsman in New York
Edited by Robin J. Phillips