Two Tours of Duty: Kevin Naughton on Returning To A Troubled Start-up - The Venture Capital Coroner's Report

Kevin Naughton had done the start-up thing and moved on. Then came the call: "We're in trouble. Can you come back and help us sell the company?" Kevin answered the call and returned for a second tour of duty at GTess, a Dallas based healthcare claims processing start-up. Listen in as Kevin explains what he learned about hiring too fast, customer consolidation, following industry norms down the wrong road and flying blind without proper financial and business metrics.

My Guest
An entrepreneurial CFO, Kevin Naughton has worked with four different venture backed companies over 20 years. He's raised over $60M of capital from a wide group of venture capital firms. Currently, he's part of the senior team at Prodea Systems. Prior to that he was twice the CFO of GTess.

Kevin earned a BS and MBA from Bentley College. While he's lived in Texas for many years, he's a native New Englander and a life long Cape Cod junkie.
The Take Home Lessons
During his two tours of duty at GTess, Kevin saw a number of key factors that led to the company's demise.

All B2B start-ups have small customer bases almost by definition. GTess' customers began to consolidate which drove down both the number of customers and revenue.
GTess also faced a classic pricing challenge. To gain early acceptance, discounts were given. This evolved into a longer term lack of pricing discipline. Understanding how to price the value that you provide is crucial.
Start-ups are not normal. So using industry norms can take you down the wrong path. Kevin notes that sales people insisted on compensation plans that matched those of mature companies. This approach didn't emphasize new account growth which should have been the top priority.
Pressure to hire faster and accelerate growth, however, creates its own problems. Kevin explains that rapidly expanding your sales team before you understand the sales model and cost structure creates huge problems.
Lastly, like any good entrepreneurial CFO, Kevin worked to create financial metrics to understand the business. Without these a start-up is flying blind. In a distressed company, these metrics become critical to stopping the bleeding and communicating with potential acquirers.

Resources & Links

Kevin on LinkedIn
Prodea Systems
Anousheh Ansari - Kevin's boss and the first private female space explorer

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Why a Venture Capital Podcast About Failure?
From early childhood you've always heard the saying "Learn from your mistakes." In the venture capital industry you frequently hear "Fail fast" to learn and get to the right idea. Great advice. So, for this venture capital podcast I interview venture capital backed entrepreneurs about what they learned when their start-up didn't go as planned. I hope you can learn from their valuable experience.

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