I’m constantly paranoid about how well Colony does as a business. Since we started we’ve been lucky, constantly beating targets. Every quarter that passes we break new occupancy, average prices, revenues and EBITDA records so things look like it’s doing very well but I’ve always told people internally and externally that some shit will happen eventually that will cause us to miss a quarter’s numbers.
That quarter is this quarter. How do I know even though we’re not even 1/3 through the quarter?
At Colony we set up these things called leading indicators that are meant to tell us in advance how our business is going to do in the next 2-3 months. The idea behind this is to see a problem before it happens and fix it before then. This has worked very well for many aspects of our business. There is one problem though where the leading indicators started showing cause for concern as far back as 6 months ago, but while I took some steps to solve it, I didn’t do what needed to be done.
The unfortunate thing about this problem is that the solution isn’t something that I could fix before the quarter ends. It’s something that will probably take 3 months to fix, so that’s how I know we’re going to miss our targets this quarter. To add to the problem, this last quarter of the year is especially important to us because we’ve been having talks with some parties on a really big fund raise next year. Missing targets in Q4 would make us look bad and may scare away the potential investors.
So for startups in my situation there are 2 potential way-outs for this.
- Even if it comes out bad, just sell on the other metrics that are growing and easier to fluffFor coworking spaces, when revenue, average price per workstation or EBITDA numbers are bad, coworking spaces can just rely on talking about how many “members” they have or “occupancy rates”. Both metrics that are easier to “pump” and “fluff” and could be used to show some growth story. I didn’t want to do this because I believe in having a consistent set of metrics that we share with investors and with the team so the team knows exactly what we’re going after every quarter.
Which brings us to the alternative solution…
- Spend to pump the metric we need just to get us over Q4 and finish the raise.This would mean if I need to pump revenue I cut prices, or spend more on advertising just to boost occupancy even though I know it’s a short term game because cutting prices means taking on customers that will leave us eventually when we try to normalise prices. That means we’d be spending money on acquiring the wrong kind of customer.The problem with this method is that this isn’t what anyone would do if they had their own money at stake. For example say my problem is that our website has below average conversion rates because of the way it’s built. Before I spend a boatload of advertising money, it’d make sense to fix the website first right otherwise it’ll be an inefficient use of marketing spend. But in this scenario, if you’re chasing a Q4 number, you do it anyway because you have to hit that number right now to show consistent quarter to quarter growth all the way. In other words you fake it till you make it.
To be sure I called up two of our biggest investors at Colony: Oak Drive Ventures and Cornerstone Partners (a hospitality sector focused private equity firm).
I explained the problem I faced and then told them that if it were my own money, I wouldn’t spend more marketing money to pump the metric for Q4. Instead I’d rather take a miss in Q4 so I can fix the problem and then spend the money next year when I’m ready. I also explained that even after allocating all the investments for all the new locations we’ve committed to open next year, we still have millions in the bank as a safety net so even if we don’t raise money, we’re not going to go broke.
When I was done explaining, Cornerstone’s CEO asked me
“Tim. Do you know why we invested in you, when we have the chance to invest in so many other coworking spaces? We invested in you because of all the spaces we’ve seen, you’re the only one that makes money. You’re able to do so because of a combination of financial discipline, to picking the right locations, to negotiating good landlord deals and executing the business well. That is the value of the Colony and I think the type of investors we want would value that beyond just what you report in metrics”.
Oak Drive too agreed and explained that they were in this for the long term. So any decision I make should be for the long term. That was settled then. I would just focus on fixing the core issue and not throw good money after inefficient results.
At the end of this whole episode it really made me realise how important it is to have the right kind of investors with us. It doesn’t matter whether we’re selling coworking space, serviced office, event space or virtual office in KL… the end goal is to do it in a profitable and sustainable manner.