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Overcoming a Failed IPO During the Sub-Prime Meltdown

failed IPO

Show Notes from Episode 1 of The Real Deal…What Matters Live.

Turning Around a Failed IPO Using the Principles in the PLAN COMMIT WIN® Methodology

Hi, this is Patrick Henry, the CEO of QuestFusion, with The Real Deal…What Matters Live! This is our first episode, Episode 1 of our new show, and we’re super excited about it. We don’t know exactly how it’s going to go. You never know what’s going to happen when you go live, but we’re going to try to provide the best information and insights to the entrepreneurial community out there, and all of you startup CEOs.

My Role as the CEO at Entropic Communications

As many of you know, prior to forming QuestFusion, I ran a company called Entropic Communications for about 11 years. Entropic developed the enabling technology for multi-room DVR and a number of other key innovations within the home entertainment space. Today I’m going to share with you a story about one of the most significant days in my life as the CEO of Entropic.

Experiencing a Failed IPO

It was December 6th, 2007, the final day of Entropic’s IPO road show. It was about 4:30 in the afternoon, the sun was setting, and snow flurries were beginning to fall in New York City. Over the last two and a half weeks, my CFO and I had been coast to coast twice and visited Europe, meeting with prospective investors, and we were now being chauffeured into New York City in this big black Cadillac Escalade. As the CEO of a company that was about to go public, I should have been ecstatic, but instead I had a knot in my stomach. See, earlier that afternoon, our lead bankers from Credit Suisse and Lehman Brothers informed us that Entropic had a ‘failed IPO’ and that we would not be able to go public. They advised me and Dave, my CFO, to go home, lick our wounds, and try to enjoy the holidays.

The Sub-Prime Meltdown Thwarts the Entropic IPO Process

See, about a month and a half before we started the roadshow, news first broke of the collapse in the sub-prime mortgage-backed securities market, and by the time we hit the road, fear, doom and gloom had captured most of the interest of the portfolio managers of even the largest and most highly respected hedge funds and mutual funds on Wall Street; the firms that were going to be our largest shareholders in the IPO. Our banker’s felt that we could maybe take another crack at the public markets maybe six to nine months down the road. By then, the sub-prime meltdown will have blown over. But we needed the cash from the IPO to continue to execute on our growth plans.

Turning the Situation Around Using the Principles in PLAN COMMIT WIN

Today, I’m going to share with you how we turned this catastrophe of a ‘failed IPO’ into a miraculous success story for Entropic and our investors by taking the company public the following day. And I’m going to share with you the process we used to help us successfully navigate through one of the most difficult and challenging 24 hour periods of my professional career, and how you can do this too.

Experiencing Setbacks and Feeling Like a Loser

Have you ever been working toward a really important outcome and it fell through? Or have you lost a big customer or a big business deal? I know about you, but I sure have. I don’t know about you, but when that happens to me it sometimes makes me feel like a total loser. And if you read the Yahoo chat boards about me during my tenure as a public company CEO, you’d find out there were times when that feeling was widespread, especially since people could be anonymous!

As Business Leaders, We Can’t Let Setbacks Shut Us Down

As business leaders, we can’t let these setbacks shut us down. As a CEO, you must make decisions, sometimes hard decisions, even where there’s a ton of uncertainty, ambiguity and sometimes anxiety, just like I had during this “failed IPO” period.  It’s in situations like this that you may get conflicting advice and opinions from your team, your board, and your advisors. You will need to consider the ramifications to all of your key stakeholders, and set a course of action that you think is best for the company.

The Harsh Reality of Startup Failure, and the Very Low Odds of Success

All of us in how difficult it is to grow and build a successful business. We’ve all heard the statistics: Seven out of ten new startups fail and the odds are even a little worse for venture-backed companies where 75 percent fail. What most entrepreneurs don’t realize is that only about 200 companies out of roughly 500,000 new employer-based firms founded in the US each year reach $100 million in annual revenues.

That’s only four one-hundredths of a percent, not 25 percent or 30 percent. Just think about that for a minute. That is less than 1 percent. In fact, that is less than one-tenth of one percent. VCs are trying to find the 200 companies per year in that exclusive club because that is how they make money and stay in business…Entropic was one of those companies.

The Entropic “Success Story” Wasn’t Easy

But, it wasn’t a linear path to success. It wasn’t some rosy ‘up and to the right’ success story. There were a lot of ups and downs, and even times of tremendous skepticism about our company even making it at all, much less making it big. So how do you become part of that club, the one in 2,500 companies that’s truly successful in terms of return on investment and wealth creation? Isn’t that what we all want? Well, that’s what we are going to talk about today.

The Creation of the PLAN COMMIT WIN® Methodology

Today we’re going to talk about my experience, decades of experience as a serial entrepreneur building and growing businesses, experiencing difficult challenges and experiencing painful failures. And based on that experience, I’ve developed a three-step process that will dramatically improve your chances of business success and revolutionize the way that you make decisions as the leader of your company. It is called plan…commit…win. Let’s start with the plan.

What is a Real Plan for Your Business?

I know many of you have seen business plans, and I’m sure that you may have written one or two yourself. I know I have. I call these promotional plans because they are designed to present to investors. That’s very different than a real game plan for your business for the next 12 to 18 months. A real plan digs in deep, and honestly asks and answers hard questions about your market landscape and how you make money. I joined Entropic in 2003, before the company had a product to sell and before we had any revenue. It was my third startup CEO job. The company had some of the most talented engineers in the world, bright and innovative minds, and a vision of how our product was going to transform the world. What we didn’t have when I joined the company was a detailed game plan to drive that vision into reality.

Sure, we had a business plan for raising money, but that’s very different than having a clear plan of action, a roadmap, that everyone can follow, where you can measure results, and test and refine that plan based on customer engagement. So, our company went through a thorough strategic planning process, and then we developed an annual operating plan and budget based on that. We looked at scenarios and potential outcomes, and implemented the plan. And we ran this process annually. But what exactly is a thorough strategic planning process? Well, let’s take a look at an analogy. If you’re going a multi-day hike in the woods, you probably should have a plan.

You might want to study a topographical map and look at the weather forecast. Will it be colder at night or at higher elevations? Where are you starting and where do you want to go? You need to plan your provisions for the journey including food, water, and shelter to successful get from Point A to Point B safe and healthy.

In business, the map is about your market, your customers, the competitive landscape, and how your company’s team, products, and solutions stack-up in that environment. ‘Where do you want to go?’ is measured by your key milestones over the next 12 to 18 months. Milestones can include revenue, product development progress, customer traction, and other key financial and non-financial metrics that are important to gaging your progress as a business. Then you need to know what resources in terms of people, capital and cash to successfully traverse from your Point A to your Point B. Sounds simple, right?

Too simple! And we all know that! In business, the map is constantly changing. As business leaders, we need to constantly monitor those change and adjust our plans accordingly.

What do We Mean by Commitment: Focus, Adapting, and Mentorship

And that gets us to the second part of plan, commit, win, the commit part. Commitment in this context is all about keeping the key strategic objective in mind as you deal with the tactical challenges of the journey. This is where many companies end-up in what I call the startup graveyard or the trash heap. These are difficult and challenging times that you have to deal with. There is where there are three elements of commit in this context. The first is about FOCUS.

The level of focus is what differentiates mediocre from good and good from great? Some people call it discipline, some call it grinding, some call it grit. It is about doing what’s right instead of doing what’s easy. It is about doing the difficult things, day in and day out, grinding things out, despite adversity, or an apparent lack of progress, and sometimes even boredom. I think the level of focus is one of the most significant things differentiates between success and failure in business, and for that matter, many other aspects of life.

That leads to the second part of commit in this context, it is about dealing with adversity and ADAPTING those kinds of situations. At Entropic, we had to constantly adjust to setbacks like lost designs, deployment problems, angry customers, upset investors, and fierce competition. On the day of December 6th, 2007, there was only one person on this planet that felt we could take Entropic public the following day… and that was me.

You need to continue to believe in yourself, and in what you’re doing, even when others do not. At Entropic, no one believed that our technology would become the de facto standard for home networking of digital entertainment, yet, today it is deployed in over 60 million homes in the US, and millions of other homes throughout the world. Entropic had a vision, a plan, some key goal, and a commitment to win.

That gets me to the third part of commit, which is having a great MENTOR. A great mentor can be the difference between success and failure, because being a CEO is a lonely and difficult job. You don’t really have peers and you can’t tell everything to your team or your board, but to succeed you can’t operate in a vacuum either. A strong mentor can help fill that gap.

Helicopter Skiing is a LOT Like Running a Company

I’ll give you an example. About 15 years ago, I went helicopter skiing in the Bugaboos in British Columbia, Canada. I was an advanced snow skier prior to signing-up for the trip, so I felt pretty comfortable about it. On the first day of skiing, a helicopter took us up the mountain, and landed in this little clearing in the woods. This wasn’t at all like the trip brochures that showed delighted skiers gliding down beautiful powder-covered glaciers with no obstacles. My helicopter dropped us in the forest.

As it turns out, over half the skiing at Canadian Mountain Helicopter Resorts is what’s called ‘sub-Alpine’ skiing. Which basically means that you are skiing in the forest, with gigantic trees on both sides of you and in front of you with these massive 30-foot deep trenches around the trees called ‘tree wells’. You definitely don’t want to fall in a tree well. I thought to myself, ‘Are you kidding me!?’ The Entropic IPO was kinda like this. I thought I was going to be doing all of this amazing open terrain skiing, but instead I was ‘dropped in the forest’ of the sub-prime meltdown.

Heli-skiing, like running a company, is very technically challenging, and that assumes the conditions aren’t changing day-to-day and week-to-week. Which of course is ridiculous, because the weather changes.  In business, there’s constantly ongoing changes as well, some subtle and some dramatic, and we need to constantly monitor the market landscape and adjust accordingly. At Canadian Mountain Helicopter Resorts, they have expert guides that help you navigate the mountain. My heli-skiing guide kept me safe, and probably kept me alive. And that’s getting to the adapting part and mentorship part of running a company.

Like Great Athletes Have Coaches, Great CEOs Have Mentors

Like great athletes have coaches, nearly all great CEOs have mentors. Let’s look at a couple or really notable examples. When Google hired Eric Schmidt as its CEO, he retained Bill Campbell, the former chairman of Intuit, as a mentor. Steve Jobs had a various  different mentors during different stages of his career including Robert Friedland, the founder of Ivanhoe Mines, and Bob Noyce from Intel It is amazing to me that so many CEOs think they don’t need a mentor, when the right mentor can help you navigate more quickly  through the most difficult challenges and obstacles of running a company. If you don’t have a mentor, I think you should definitely find one.

The Win Part of PLAN COMMIT WIN: Finishing and Selling Your Ideas

That gets me to the practical application of part of plan, commit, win. The win part of plan, commit, win deals with how to improve your winning percentages and how to win in business. We’ve all had our share of wins and our share of problems in business. But how do you win consistently.

Well first, you can’t win if you don’t FINISH, so that means that you keep playing the game, sometimes even jn the face of dire circumstances. You can’t win if you quit. That’s why I’m not a huge fan of ‘failing fast’ and the glamorization of failure in today’s startup environment. Of course, we’re all going to experience failures, and we’re all going to have setbacks. But that’s different than giving up. If you’re always quitting, then you’re always starting over. And you may miss some of the best learning opportunities of going through the most difficult and challenging times. And you definitely eliminate your chances of winning.

But winning is more than just finishing. To win in business, you need to enlist the support of others. Startups after all are a team sport. So that means that under a variety of circumstances you’ll need to CONVINCE your team, your board, and your investors that your plan of action is worthy of their support. This is really about selling your ideas. When you’re selling your ideas, it’s important to understand what is in it for them. Your audience. What makes them tick their problems, and their struggles. Then, you need to sell your ideas in the proper context to achieve your desired result.

How did We Turn-Around the ‘Failed IPO’

So, let’s get back to the Entropic IPO and how we dealt with that situation. You see, sometimes we are told that there are only two options in a situation. Do this or don’t do this. Take the company public with the current plan, or go home, lick your wounds and try to enjoy the holidays. In reality, there are an infinite number of options available to us in most situations. Why do we have to be at either zero degrees or 180 degrees?  Maybe I want to be at 90 degrees. In the case of the Entropic IPO, we were marketing our deal with 10 million shares for sale in the public market at a price target of $9 to $11 per share. This plan seemed really reasonable in the summer of 2007 when we were contemplating the IPO. But the world had changed. It was now early December 2007, and in every investor meeting the portfolio managers were hiding under their desks. I needed to drag them out from underneath their desks to hear our pitch, and then they would crawl back under their desks after our meeting. Figuratively, of course. Here’s what we did that made the big difference in dealing with the failed IPO…

We had implemented PLAN COMMIT WIN before the IPO roadshow. It’s like the old question: When did Noah build the arc? Before the rain. Since we implemented PLAN COMMIT WIN, we had an excellent map of what we needed in order to continue to be successful. We needed at least $30 million in cash to execute on our plan over the next couple of years and instill confidence in our customers that we would remain vaiable. Yes, it would have been nice to have north of $100 million of cash on the balance sheet and it would have given us more flexibility to do acquisitions, but that level of cash was not required to run and grow the company organically. Now the important part.

The Really Important Part

We asked our bankers questions about the specific feedback they were getting from prospective investors. Would people invest at any level? What were there specific problems with our deal? I had my CFO call the second tier of bankers that were marketing our IPO to find-out what they were hearing. We found out from our questioning that there was potential interest in our deal at $6 to $8 per share, and that we might be able to secure a smaller group of shareholders, where each shareholder would have a larger stake in Entropic.

I made a recommendation to our board that we cut the number of shares in the IPO from 10 million to 8 million shares and market our deal in the lower price range. After a lengthy discussion, they supported this plan. We hopped on a call with our reluctant bankers, and after lots of push-back, one of the more experienced and highly respected bankers on the phone said, “Let’s do this. We’re gonna get this deal done.”

Going IPO With a Revised Plan: Smiling and Dialing for Dollars

On December 7th, 2007, which ironically is Pearl Harbor Day, our IPO team was at the Credit Suisse office in New York City, in a big conference room on the top floor, smiling and dialing for dollars. “Federated Kauffman came in.  Fidelity came in.” The ball was rolling. We priced the IPO that afternoon, and fortunately for us, it was not a day that will live in infamy, at least for Entropic. WE DID IT! We had successfully taken the company public!

We raised $48 million in our IPO, which was very fortunate for us because a week later the IPO window closed the next two years. That cash allowed us to survive through the great recession. Many other companies did not survive, including one of our lead bankers, Lehman Brothers. So, what’s the lesson?

What Does it Take to Succeed in Business?

To successfully run a company, you must have passion, a competitive spirit, and sometimes a strong stomach. But that is not enough. You need to have a plan, a map of where you are going and what it will take to get there. You then need a commitment to that plan including an ability to focus during times of adversity, chaos and sometimes even boredom. You will need to adjust to an ever-changing landscape, and a willingness to cultivate strong mentors that you trust and can confide in. Finally, you need to know how to finish and rally support behind your cause in order to win!

My Free Gift to You

I greatly appreciate your time and attention and I have a FREE gift to you. Just fill out the comment card or go to to download your Guide to Smart Ideation, the 5 step process to creating a winning business. Smart Ideation is at the foundation of the PLAN COMMIT WIN process. If you want to be part of the $100 million revenue club, start with Smart Ideation. Thanks again for coming today! I love working with entrepreneurs, and I want YOU to be the next great startup.

This is Patrick Henry, with The Real Deal…What Matters.