A few months ago, I was sitting in our big boardroom in Colony across from ODV, our biggest investor in our seed round. J who was the CEO of the fund was in KL for the first time in years to visit Colony after his team told him that he had to come to experience Colony to really understand what they were investing in.
I watched him happily nod as I presented our business performance. The business was doing way better than expected and we were growing rapidly in all four of our key metrics: Revenues, Profits, Occupancy and Price per workstation (which affects margins). At the same time we were getting offers from other investors who were keen to buy a stake in the company at more than four times the valuation ODV had invested in six months before.
Things were looking good until I paused the presentation and said “If you look at all our business metrics, everything is looking good. But I think it’s important that I show you what’s under the hood… and we do have some serious problems”.
I explained to them how revenues, profits, occupancy, price and even financial statements are all “lagging indicators”. Meaning they’re numbers based on past performance and are no guarantee of future performance. My job as CEO though isn’t to celebrate past success but to look at problems I’ll have in the future and fix them before they happen. For those I need to look at “leading indicators”. Numbers that will tell me something is wrong before they actually lead to bad financial results.
There are a number of leading indicators I set up early this year. For sales it’s just pipeline, number of tours, number of leads etc etc. That’s easy and common. But I needed a way to measure future customer retention (no point winning customers if we can’t retain them) and because I believe happy employees lead to better business performance I needed to measure employee happiness too.
My solution for this was to adopt what we call a Net Promoter Score. Here’s Wikipedia’s explanation of that score.
The Net Promoter Score is calculated based on responses to a single question: How likely is it that you would recommend our company/product/service to a friend or colleague? The scoring for this answer is most often based on a 0 to 10 scale.
Those who respond with a score of 9 to 10 are called Promoters, and are considered likely to exhibit value-creating behaviors, such as buying more, remaining customers for longer, and making more positive referrals to other potential customers. Those who respond with a score of 0 to 6 are labeled Detractors, and they are believed to be less likely to exhibit the value-creating behaviors. Responses of 7 and 8 are labeled Passives, and their behavior falls between Promoters and Detractors.:51 The Net Promoter Score is calculated by subtracting the percentage of customers who are Detractors from the percentage of customers who are Promoters. For purposes of calculating a Net Promoter Score, Passives count toward the total number of respondents, thus decreasing the percentage of detractors and promoters and pushing the net score toward 0.
In Asia it’s particularly hard to get a positive Net Promoter Score because we’re more conservative. To us if we were asked “How likely are you to refer <brand> to a friend?”, giving a score of 7 or 8 would be us giving a good score. But in NPS surveys, that’s a passive (neutral) score. Not a promoter. In any case it’s not just the score that matters but the feedback we get later on why we got those scores that give us a good insight about what we need to improve.
I took the time to explain all this to J and then pulled out a slide to show him what our NPS for customers and employees are. On a score of -100 being the worst, to 100 being the best, our customers rated us -6. For employees? We got a -44, a disaster for me since I have every intention to build a company that puts employees first. I thought everyone was happy but the data says I was wrong.
I went on to say that these were worrying numbers to me and if I did not fix this soon, it will eventually lead to declining business performance (Those 4 metrics? Yeah they’ll be going down). After I finished I sat back down on my seat and waited for J to give it to me but he didn’t. He just nodded. We ended the meeting shortly after and I went back to work while the ODV team stayed in the room to discuss other matters.
A couple hours later I went back to see if they were ready for me to bring them out to dinner. As I walked into the room, J asked if he could bounce an idea off me.
He then explained how whatever he has invested in Colony so far is already at the limit of his fund’s mandate so he didn’t come to KL with any expectation nor intention to further invest in Colony. But after listening to my presentation, he found that Colony was a very good business and he appreciated how honest I was about our shortcomings.
“You know… we’ve invested in many companies and very rarely are the CEOs so forthcoming and honest with the problems of the business. Your honesty tells me that you really value your relationship with your investors”.
I replied that to be fair, it’s really to my own self-interest because I could hide the mess under the hood or fluff things up, but how long can I hide it for? 3 months? 6 months? Sooner or later it’s all going to catch up to me.
“That’s true. But not many people think that”,
He went on
“Anyway… I’m going to tell you that we’ve never done this before for any one company but what would you say if we doubled our investment in Colony?”.
I let those words sink for a while and I thought about it. It’s a good thing to have our investors want to put in more into Colony but I had one worry. If I took this extra money there would be a significant oversubscription to the round I intended to raise. Which means I’d dilute my stake more and I intended to give a chunk of my personal stake to key employees of Colony so they could all own a part of it. I’m not greedy for economic rights of the shares I own. What I do care about is control of the company because I’ve had ventures in the past that have failed because I didn’t have control of the company and couldn’t do things the way I thought was best.
If I diluted too much, I would fall below 51% voting rights of Colony. I conveyed these worries to J and he said
“Do the math. If you end up with less than 51% voting rights, you can have our voting rights”.
I was stunned. What did I do to deserve such a great investor. It turns out I had other great investors too, most of whom doubled down or more than doubled down on their initial investments. On top of that we had new investors too that contributed to the war chest we have today to expand Colony.
Still I had to fix the problems we had. So after that meeting I hunkered down to work on our NPS. I’ll explain the steps I took maybe in another article but fast forward today here’s what the team at Colony managed to pull together:
- We just reported a customer NPS of +40.
- 51% of respondents were promoters that means they gave us a 9 or 10.
- 37% were passives meaning they gave us a 7 or an 8 out of 10.
- 12% were detractors meaning they gave us 6 or below.
- Employee NPS also went from a -44 to +33.
Does it correspond with business performance? Hell yeah. We reported 91% increase in Profits (or more specifically EBITDA) in Q2 vs Q1 in our first location. Our second location at KL Eco City is expected to open next week and we’ve already sold 56% of the space even before opening.
This key takeaways from this is:
i) People who have millions to invest have millions for a reason. They aren’t stupid and they know when you’re trying to fluff then. It’s just a matter of whether they bother to look or not.
ii) Be radically honest with investors or shareholders. It builds trust and if business ever takes a downturn (which all businesses at some point do), trust is the currency we’re going to need the most.
iii) Being honest with the bad metrics forces you to act to fix it. Perhaps I’m the type that work better with pressure but hell did I get my ass working on fixing the NPS.
As for J? I sent the investor update with our latest results for Q2 this week and he replied
“Thanks so much for this update Tim. Looking good :)”