A month or so ago I held a difficult meeting with all the employees at Provo Labs. I started the meeting by admitting that I had made some mistakes in the past six months. Specifically, our burn rate got too high as we hired too many people, particularly developers. Our sales and marketing investments weren’t sufficient enough to cover our overhead. And more importantly, we weren’t creating dedicated teams for each new company idea, and giving the team members equity and letting them take risks along with the investor (Provo Labs), risks such as lower-than market salary. Instead, we were paying full salaries, and not giving options out, and shifting people from project to project. We should always be in bootstrap mode and we should not try to do so many things at once.
In fact, I now believe that rapid serial entrepreneurship is superior to parallel entrepreneurship, at least for me. I’d like to do one company at a time until it gets on its feet, before shifting attention to the next one. Maybe I’ll try that in the future.
So at the company meeting I announced that Provo Labs would return to its roots as an investment company in seed stage startups (usually from ideas that I generate) and that all the existing staff would be assigned to one of the existing portfolio companies (some of them were already dedicated to a single company already) or be let go.
Our remaining funds were not going to be used to incubate new startup companies, but to support the 11 companies in our current portfolio. Specifically, I am choosing to fully fund 10Speed Media, a promising company that runs a video affiliate network mainly for direct response video, and WorldVitalRecords.com, which aims to be the #2 genealogy company in the world.
I was blunt in saying that our other companies would have to sink or swim, or as one developer put it, eat what they kill. This of course causes everyone in each company to focus on generating revenue. That is a good thing.
I also said that options would (finally) be available for employees in each company. (It was always the intention to do this, but we didn’t always get around to it). If sacrifices have to be made by team members, then of course they are taking risks and deserve the reward of more ownership.
The meeting went better than I expected, but it still made it very difficult to let go of 6 talented employees who don’t fit with the current needs of any of our portfolio companies, or where funding just isn’t adequate to keep them.
Hardest hit was the development team, led by Phil Burns, an extremely creative and well connected technology, and someone who has become a good friend over the past year. My proposal there, since Phil had been working for a few weeks to find contract work from outside clients, was to spin out the technology team into a new company that does Web 2.0 development work. One of my close friends helped form Erudite, a development outsourcing and training company in the 1990s that was the fastest growing company in Utah for 2 years in a row. Doing contract development work is not necessarily a high margin business, but with a focus on Web 2.0, and with a large network of developers and a nice reach into the blogosphere, I was hopeful that Phil and his team could land some large contracts and keep things going.
Provo Labs original vision was to fund 12 companies over a 3 year period with up to $250,000 in funding, and to use that seed capital to get to cash flow positive or to be positioned to raise capital from angel investors (thus, the importance of FundingUniverse.com) or VCs.
I think we hired too fast and spent too much money, so in the end, we’ll probably only end up with 8-10 portfolio companies that got as much capital and as much as my time as I would have liked.
But in the seed stage investment game, if just one small investment goes well, the entire fund gets repaid and the investors do well. In our case, we hope that more than half of them will succeed. And to me that means at least a million in annual revenue within 3-5 years. We have several companies that should achieve that. And we have a couple that are very promising — big ideas and a great team.
What we don’t have is a large payroll now (we’re down to 3 people on the Provo Labs payroll) or a lot of talented developers working on new technology.
What we do have is the peace of mind that comes from a low burn rate and a focus on the top priorities.
I believe that I have maintained a good relationship with most of the people affected by the layoffs, and I am of course still involved in the active portfolio companies, helping where I can with strategy and marketing.
I have read some of the blog posts about the changes at Provo Labs. When every employee in a company is asked to blog regularly, and then when a change like this happens, of course lots of people will have lots of things to say.
I know this was a difficult change for many people. But we couldn’t have gone on indefinitely without running out of money. Our fund is a small one and it has a definite strategy. For me, this reorganization was a painful but necessary return to the original vision of Provo Labs being an investment fund, not an operating company.
I made the changes openly at a company meeting, admitting my mistakes, and I hoped for and actively worked for a good outcome for those who were affected. I can’t guarantee that everyone will end up with a positive outcome, but as one former employee said in a recent email, he is a better person and employee for the time he spent at Provo Labs and what he learned from our successes and failures. I hope everyone feels that way. If not, I’m sorry. I’d be happy to have a private conversation with anyone who hasn’t yet given me a piece of their mind. 🙂
I’ve been very gratified by the amount of goodwill that exists among the former Provo Labs team and the current portfolio companies. If there is any animosity or back-stabbing, I haven’t seen it (or felt it yet!). Well, I saw a little, but it seemed resolved with an anonymous poster bravely stepped forward to apologize about what she had written.
I welcome any comments to this post and any questions that you want me to address in future posts.