Advice to Founders in this Crisis, Based on my Mistakes in the 2009 Crisis
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It is now clear that an economic crisis is coming. Some have already begun to feel it, for others it will become apparent in the next few weeks. Based on my personal experience, I think it will hit startups extremely hard. Running my own fast-growing startup in the lead up to the 2009 financial crisis, I made some critical errors as CEO. My choices back then made an already very bad situation even worse and that pain has shaped my advice to founders in this crisis.
Perhaps this short read will help your company stay liquid six months from now – which for many is not going to be easy. If only I’d been given this advice in 2009… which I was, and I ignored it. If you want to suffer then I suggest you ignore it too.
A quick world on COVID-19
A week ago this section was called: Does COVID-19 really matter? The absurdity of this question is an indication of how fast this situation is evolving. Let me instead share some quick thoughts and how the spreading pandemic will likely impact your business.
For the lay-people who posted “This is just the same as another flu”, it is now obvious that it’s only the same in the sense that they know nothing about either COVID-19 or Influenza. You do see the occasional fool still posting such things but the world has largely now understood that the high rate of spread makes it totally different. We are actually very lucky it’s not influenza, which in contrast to COVID-19 makes all sufferers very sick and badly afflicts children. Venture capitalists Sequoia called COVID-19 a “Black Swan Event” as have others. I strongly disagree with this characterisation. A novel pathogen that infects the globe is an extremely improbable but inevitable event and we were just slow to respond.
How this pandemic will be managed is the key element that will impact business. Even in the high tower of medicine there is little agreement. Professors of Infectious Diseases in the UK argue for “herd immunity” which basically means let it spread (this is total unproven outside of a vaccination setting and is scary to me), whilst the same level of expert in other countries advocate full lockdown to slow the spread. It’s widely agreed that the time for containment is over and only Taiwan succeeded in this.
After an article in the Lancet that found Wuhan dropped it’s rate of spread (R0) for 2.6 to 1.05 with a full lockdown, it’s likely that most countries will end up with something between moderate “social distancing” and a full lockdown. Italy and Spain already have the latter, with France and Ireland close behind. Israel has had a creeping lockdown gradually rolling out for weeks. Authorities globally worry about the exponential growth curve as when medical infrastructure is overwhelmed the death rate increases up to 10x. See Northern Italy.
The part of COVID-19 that is probably going to impact your business most is effects of prolonged “social distancing”, and the global panic. Your office will be closed if it isn’t already, lots of other things will also be closed, events will be cancelled with huge flow on economic effects, consumer confidence is dying, and overall the gears of the economy will grind to a halt for a while. We have seen massive rate cuts and financial system support already as leaders come to terms with the resulting global economic slowdown.
Therefore I’d like to share some ideas about how you might stop your company going broke as COVID-19 looks like hanging around for months to come.
Here are the big mistakes I made while running a startup in the lead up to the 2009 financial crisis, and how this is shaping my advice to founders around COVID-19.
Famine on a remote island
I find that analogies are wonderful devices for understanding complicated systems and for me global downturns are like a famine striking an island ecosystem. The famine is widespread but not universal, and starts slowly before gaining momentum.
In this famine the first animals to die are the thin and malnourished, who live paw to mouth with no food stores. The business equivalent is a company that is already losing money or making a small profit on poor margins, with limited cash reserves and no capacity to access additional capital. Without a big dose of luck they will probably die – irrespective of any actions taken now.
The animals that die next are those with very large appetites. Perhaps they have some stored resources but without a steady flow of new food these are quickly depleted. Their diet is their doom and they realise too late to adapt. In business these are companies with high fixed expenses that can’t be quickly reduced. As sales plunge variable costs can be cut, but it’s not enough. Fixed costs consume the cash and deliver a long, suffering death. Most keep hoping for a life-saving big deal right until their final breath but of course in the famine it never comes.
On the flipside there are also beneficiaries. The famine isn’t universal so while some food sources diminish completely and others reduce markedly, a minority will be totally unaffected and a fewer still might even grow. Those who should experience some market growth in this famine include companies facilitating remote work, producing OTC pharma, delivering stuff, or operating medical services. If you are in this group good luck to you!
Of those whose nutrient supply is diminished, the best survivors will have hoarded resources and can comfortably endure the great hunger. These are like the companies with big net cash balances relative to their operating requirements.
This well-resourced group can benefit from a famine and expand their territories as weaker competitors die and their numbers reduce. The strong survivors will also be able to eat the weak. I know it sounds gruesome but our evolution is predatory and adversarial, and so are our societal systems including business.
So can you handle the truth? (Spoiler: I couldn’t)
The first and most important lesson from the famine analogy is to accept that the famine is coming before the food is gone. This was my biggest mistake in 2009. Our company had grown for 7 straight years, we had never fired anyone except for performance, and we continually moved to larger and nicer offices.
My wrong choices were not for a lack of good advice. I had a very experienced and wise Board, several of whom had early warning of the impending disaster via their own businesses. Rich, smart, and successful, they repeatedly implored me to cut costs and fire staff well before the worst set in.
I thought they were all pessimists who didn’t understand our business. We had recently passed $10m in revenue and my sense of self-worth was linked to being CEO of a fast-growing startup. I couldn’t emotionally accept anything else.
The result of this self-delusion was terrible. Many people suffered huge stress and turmoil that would have been lessened significantly had I listened to my board and acted early. It didn’t help that my financial and accounting literacy was poor at the time.
Accepting reality early is the foundation upon which all other steps are based. In most industries it is not yet too late as the famine hasn’t fully begun. Perhaps you can escape it, perhaps it doesn’t apply to you, but more likely you’re wrong. Over-react and you can always rebound because where there is life there is hope and opportunity. Delay and you’ll quickly become the walking dead.
But HURRY UP because in the week since I first wrote this article things have slid fast! If you haven’t already accepted that there is a global recession coming and it will hammer your business then you have about ten seconds to wise up or you are dead.
Learn to eat less now!
You cannot survive a famine with a huge appetite and few stored resources. If you have lots of (net) cash in the bank then you’re breathing rarefied air. Preserve it! If like most businesses you don’t, it’s essential to reduce your fixed cost base ASAP.
Here are some easy wins: delay your office move or refurbishment. Cancel your co-working subscription if it’s casual. Reconsider non-essential hires. Postpone upgrading non-essential IT systems. Reduce discretionary marketing spend that is not linked directly to sales acquisition. These decisions made across an economy are precisely what leads to recession. But you are not going to single-handedly stop the recession with your choices so focus on ensuring your own survival now.
Once you’ve quickly secured these easy wins it’s time to move to the much harder phase that involves reducing “Employment Expenses”. Firing people is the worst part of business, particularly those who are loyal to the company. But it is far worse for a company to die in its entirely and then have to lay off everyone. As one of my staff taught me a decade ago: careers go on, broke companies do not.
Draw up plans now to reduce non-essential staff. Non-essential means you can survive for 6-12 months without them. Those remaining will take a hit to morale and will need to work harder. They might quit. You’ll also struggle to grow without the staff you’ve made redundant. Rest assured I’ve been through these lines of reasoning in the past and want to stress to you that they are not today’s problems.
When and how hard you need to cut depends on your expense base, industry, and cash balance, so draw up your own plan immediately (keep it confidential!). Based on my many previous errors, I confidently advise that it’s best to decide on the go-point before it arrives and to execute efficiently and all at once. In the long run this approach is best for both your company and staff so do not make cuts in waves!
Let me add one alternative to firing that can work, especially if your downturn is not long-term and your workload will pick up again in 3-6 months. No employee wants to be looking for a job now because no one is hiring. Therefore, you can offer employees a range of reduced work options to keep them in a job but still slash your cash outflow. A big caveat: only consider this option if you are realistically very likely to have the funds to pay them normally again in 3 months time. And now is not the time for over-optimism because if you’re wrong you’ll end up with “firing waves” which is a business killer. Think hard.
If the above is applicable to you then options include: a six week cycle with 2 weeks paid leave (assuming they have it) and 4 weeks unpaid leave, dropping to 60% full time for 2 months with a 3 day work week and 60% pay, asking all staff to use up their paid leave at 50% FTE for as long as possible. You can be creative, but ensure that it’s legal in your industry (!!!), you give staff the option, and you mentally commit to “making it up to them” with a loyalty bonus or some such thing if and when you can afford it.
I’ve literally had founders come to me over the past week suggesting they align their salary with cash inflows in order to ensure they don’t die. As one person said to me: I’d rather be earning 50% doing this than 100% doing anything else. Now that is the person I want to work with!! Now is really the time to bleed for your startup.
Lastly, you’ll need to think about how to treat contractors and consultants who are doing work for you. Casuals and contractors should be considered in the same way as employees – keep the ones you can afford and need (in that order), and keep your business alive. On the topic of consultants, many enterprises have started freezing their work but for you, again, the same decision cascade should apply as with everything else: (1) Do you need to cut this expense to preserve cash? If no, (2) Could you live without their services for 6-12 months? If no, (3) show them to me so I can invest in such a must-have consultancy! It’s rare so think again about point 2 and be sure! Cash, once paid out, can’t come back.
Fill up your stores to overflowing
If COVID-19 becomes a six-month pandemic (which is looking more likely) then access to capital will dry up. If you are a startup and have access to additional capital then get it now. If you are a pre-revenue or high burn startup I’d strongly advise you to take a valuation hit in order to close this money ASAP. Also, reduce spend (see above). I repeat: reduce spend! Early stage capital will dry up first and fast!
If you are a company with a debt facility then extend the maturity now. If you have just raised a round, plan to extend your runway by another 12 months. If you are a profitable company and are thinking of paying dividends, I’d delay them for now.
Your growth rate will probably slow and a full bank account is your best defence in a downturn.
Get better at finance
As a founder, you almost certainly do not understand finance well enough. The good times meant sales rolled in and hid this problem. Been there, done that. Now your business needs to be run properly and without a strong grasp of finance it will be impossible to make the great decisions your company needs.
I’m proud to say that this was one area of weakness I did address head on. One long weekend in 2009 I went away my young family. There, between relaxing in the spa with them and trying to de-stress, I read an entire book from cover-to-cover and made notes. It’s title: Accounting For Dummies. If you do not feel entirely confident standing before your Board and explaining all the numbers (without a finance person by your side) then buy it or something like it NOW and read it FAST.
Revise your sales forecasts down
Due to the various companies with which I’m involved, I see trends across industries and geographies. Even now, it’s now all a disaster yet and there are definitely some industries holding up well and almost unchanged. This is particularly true of consumer-focused businesses outside of hospitality and travel. Still, I’d reduce my conversion assumptions and increase CAC (customer acquisition cost) if I was a company selling to consumers right now (including DTC).
I’ve long been very involved with businesses that sell to enterprise, especially SaaS, and enterprise clients are already starting to suspend discretionary spending. Unlike smaller clients, at the enterprise level the person who loves your product and can’t live without it will suddenly lose all power to spend money.
Businesses selling to enterprise should immediately and significantly reduce their close rate assumptions, and lift churn assumptions. That in turn might lead to decisions on fixed costs including staff. Make sure you can survive a significant fall in conversion for at least six months.
Some industries are very resilient to economic downturns (as “sport” traditionally has been), while others are less so (last week I thought property prices were holding but I saw some bad auctions on the weekend and new dwelling sales are way down). You need to understand where your industry is likely to come out in this crisis and adjust your models – Qantas has been a great role model here.
Great CEOs are created in tough times, because the real measure of a CEO is how well they make hard decisions under pressure, with incomplete information, and with no obviously great options.
Be honest, be decisive, be bold, act with urgency, and use emotional support.
Finally, in the immortal words of Douglas Adams: Don’t Panic. You’re not the only one going through this.
This article originally appeared on LinkedIn