Three Strikes Theory

The Thin Line Between Success and Disaster

The Thin Line Between Success and Disaster

Companies, irrespective of size or type, are perpetually three lucky breaks from monumental success or three misfortunes away from catastrophic failure. It is not usually the fact that three good or bad things happen, but the convergence of these events in a short time period, that causes significant consequences.

I use the word “luck” loosely. Perhaps it is providence, perhaps it is the consequence of taking risks, perhaps it is putting yourself in luck’s way. In any case when Three Strikes, good or bad, happen - a company’s fate hangs in the balance.

As a post-exit Founder, Startup Investor, Director, Consultant and CEO Coach, I feel the Three Strikes Theory is one of the most important learnings I can share. Importantly, it is implementable by every leader, in every business.  

In working with Founders, CEOs and Leadership Teams, I spend a lot of time helping to put their businesses in (good) luck’s way (often the result of good strategy, planning, resourcing and implementation) but I also help to predict or identify when a first or second strike of bad luck has occurred, and get clarity around the risk levels of the third (and potentially fatal) strike of bad luck so that the business can take appropriate action before it is too late. 

This is really really hard to do because - as you will read in the case studies that follow - even with the benefit of hindsight many of the events themselves, the convergence of them, and the potential for one to trigger another, is very difficult to predict, but not impossible to identify or prepare for.

Below is the first case study of three outlining Three Strikes of bad luck which led to disaster in three different companies, a start up, a scale up, and a multi-billion dollar listed company. Beyond that I will share case studies of companies that reached great success following Three Strikes of good luck as well as interviews and insights around tangible and implementable knowledge to do two things:

1 - identify if and when a first or second strike of (bad) luck has occurred, and what to do about it

2 - put yourself and your business in (good) luck’s way

Enjoy,

SK

Case Study 1: Black Swan & Really Bad Timing

A promising technology service venture in a regulated sector bolstered its finances by sub-licence deals with traditional players capturing their gross revenue and subsidising their need for investor capital. However, a series of unfortunate events derailed it. From the war in Ukraine, to increased costs and decreased revenues hitting at the same time, these setbacks led to board resignations, delayed investment and a forced restructure, turning “thrive” into “survive”.

TechService is in a regulated industry, they have subsidised their need for external capital by allowing other traditional service businesses to operate under their license, capturing their gross revenue as a result and earning a licensing fee that made up the majority of their net revenue. Their numbers looked great. Last financial year they recorded $10 million of gross revenue, had raised some seed money to supplement their operating net revenues, which were what they were using to fund their internal business growth, and were just about to launch their large revenue sales solution. Investor interest was strong and a multi-billion dollar family office verbally committed to a multi-million dollar investment. “We want to do this deal” - they said.

The following three strikes happened over a period of 18 months. Each as isolated events were not critical, but the unpredicted convergence of these events created dire consequences.

Strike One: Black Swan

The Russian invasion of Ukraine disrupted the Ukrainian development team, delaying a crucial product launch by half a year, resulting in the delay of a $3 million sales pipeline. Furthermore, when TechService finally did launch their new offering the subsequent year of sales efforts succeeded in building a pipeline, but failed to convert. There is either a product-market-fit issue, or a sales issue, identified late, and a crucial gap in revenue follows. 

Strike Two: Increased Costs

Because TechService is in a regulated industry and annual revenue hit $10 million, the flow on effect was that monthly compliance expenses quadrupled, significantly impacting the bottom line. While this was predicted in part, there were so many other moving parts that this was not properly identified as a strike in advance.

Strike Three: Revenue Collapse

The unexpected departure of the largest sublicensee halved gross revenue and deeply cut net revenue by 2/3rds. While the potential of this event was certainly possible to identify, the timing was impossible to predict. Strike Two and Strike Three occurred within 30 days of each other.. so increased costs and decreased revenues hit at the same time.

Fallout

These three strikes all occurred within 18 months of each other. The 2nd and 3rd strike in the same month.

The board got spooked and all non-founders resigned as Directors. The large investment was delayed, current shareholders were hesitant to continue supporting the company, a restructure followed.

In eighteen months these three strikes of bad luck turned TechService from a company with a gross revenue chart going up and to the right for 5 consecutive years, with strong investor interest, a hopeful new product launch, a strong sales pipeline and solid net revenues that covered operating expenses, completely upside down. 

Conclusion

Black Swan events are impossible to predict, but they are not impossible to respond to. If this venture had leveraged the Black Swan event to try to raise the $3M they were expecting to convert from their sales pipeline - even at a reduced valuation - they could have taken the hits of the second and third strikes much better, despite their convergent timing, and emerged in a much stronger position.

Why did they not do this? They did not identify the first strike for what it was, so they did not take appropriate action. Why? Because they mistakenly still perceived themselves in a position of strength and did not predict the impact of future potential strikes.

Stay Tuned..

Stay tuned for next week’s case study where we delve into into a similar story for a multi-billion dollar listed company, demonstrating that the Three Strikes Theory applies to companies large and small. 

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