Navigating the tough times ahead

It’s pretty clear at this point that things are going to get a lot worse in the weeks and months to come before they get any better. The number of COVID-19 cases is accelerating worldwide. Travel restrictions have gone into effect as countries around the world close their borders to curb the spread of the virus. The S&P 500 is down 30% from its peak a month ago and the Dow plunged 3,000 points on Monday alone. Morgan Stanley is now viewing a global recession as their “base case” with an implied $360B loss to US GDP.

As if all that wasn’t enough, some of the yoy OpenTable data coming in is absolutely terrifying with respect to the broader implications we will soon see in the macro economic data. The downturn ahead of us will impact many sectors and millions of households in the US.

OpenTable

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Restructuring & Transformation in a Recession

As I’ve spent much of the past week discussing what this all means with founders in and outside of our portfolio, I find myself thinking a lot about my time in the consulting world. During that time, I had the fortune (or misfortune!) of working on a handful of projects involving companies that had fallen into hard times and required what we called “Restructuring and Transformation Services (RTS).” Regardless of the specific situation, in all of these cases, we would follow a very basic framework designed to diagnose and then triage the (mostly) cost-cutting work from “least painful” to “most painful.”

If you are a founder/CEO finding yourself in a situation in the months ahead where you need to go through a restructuring/ transformation exercise, hopefully this basic framework can help you think through what to do and how to do it.

1. Establish dedicated owners: The first thing to understand about any transformation effort is that you have to have clear ownership. In my consulting years, we would always start by working with the client to set up a “Transformation Office” led by a Chief Transformation Officer. The “TO” would lead the effort, create urgency and drive action. As a startup CEO, the buck stops with you. But it’s a good idea to create a small, cross-functional task-force to serve as an advisory council and to drive change within the organization. These people will be working on the transformation while also doing their full-time job so important to pick people who have the capacity and commitment to the company to wear multiple hats through a difficult patch.

2. Diagnose the problem: The next step is to figure out where you stand, particularly from a cash perspective. Some basic questions to ask and get clear on before you jump into problem solving:

How much runway do you currently have? Did you plan for a fundraise in the next 3–6 months? Were there big customers that were at the finish line or moving from POC to further implementation? Be honest with yourself about where those conversations are now headed and what the timelines will now look like.
Update your forecast with a new “COVID-19 discount” to the original growth plan. You can start with a tool like this to help understand top-line growth but will need to build in your own view on the P&L and, ultimately, cash position. At minimum you should assume 50% less growth and it would be prudent to plan for a base case scenario far worse than that (e.g. 0% growth or even negative growth if there is significant churn.)
Call each of your investors 1 by 1 and understand their stance on supporting you through this time. Do they have the ability to bridge you or not? How much are they reserving for follow-on? Realize that each firm is different in terms of how they plan for successive rounds and many investors may be in a tough spot themselves during this time (as are their LPs). But getting clarity up-front here is necessary.
Look at each of the functions as a % of revenue (e.g. marketing as a % of revenue, sales as a % of revenue, R&D as % of revenue.) Do some quick base-lining using resources out there like this or ask your investors if they have any internal data cross-portfolio. Figure out where you might be lop-sided and what trade-offs you are willing to make to growth vs product roadmap vs culture/ morale. This will give you a sense of the levers you have to play with in later phases of this effort.
By this point you should have a good sense of current runway and, at a high-level, what levers you have to pull to extend runway.

3. Establish the target: After you have diagnosed the problem, determined your cash position/ runway and understand at a high level what levers you have to pull, you now have a “Baseline” to work from. It’s now time to establish the “Target” for cost-take-out. This is the total cost you need to remove from the business to get to a certain “cash-inflection” point (i.e. a new injection of cash via fund raise or getting to break-even.) This target now forms the basis for all actions you put into motion. The target should be a specific number with very clear milestones (ie. mini-targets) that you can work towards achieving.

4. Create a cadence and review process: It is important that the transformation task force you meet with gets into a regular cadence (this means meeting weekly and if the situation is dire enough, daily.) Get in the habit of tracking all transformation initiatives using a project management tool. During my consulting days, we used Wave. But you can use Asana, Trello, Monday or another project-management tool of your choice. The important thing is to ensure that the tool can track initiatives, owners, progress and tie to real outcomes in the P&L. The transformation task force should regularly review progress using the tool’s dashboards and elevate the most important decisions to you, as the founder/CEO, to ultimately make.

5. Focus first on non-personnel costs: When hunting for cost-take-out, the easiest place to start with is non-personnel costs. Here are a few areas to look into — remember any savings here could well mean one less RIF:

T&E: COVID-19 has made this an easy one on the travel side but worth looking into any other spend in this bucket (e.g. planned company off-sites, conferences and trade-shows, entertainment budget for large enterprise deal-making, etc.) Almost all of this can be reduced, canceled or postponed.
Real-estate: if you were planning on decreasing footprint or moving to lower cost locations, now is a great time to pull the trigger on those plans. Worth talking to landlords and co-working spaces to see what relief you can get on space that is not being used for the foreseeable future. Take a look at the utility bill too…it should be going down when everyone is in WFH mode.
Software & applications: Good time to take stock of all those applications and tools you are using. Which ones do you really need? Which ones are necessary in the WFH environment? Which ones can you part with or, at least reduce the number of seats?
3rd party providers: Do a full review of all consultants, agencies and other professional services. What is essential? What can you let go? What can you move to lower cost providers like Upwork?
Marketing: Budget in certain marketing categories likely needs to go. The targeted, personalized, high-ROI items should stay but anything that does not have clear ROI will be harder to justify.

6. Be thoughtful about personnel costs: For obvious reasons, things get tricky once you start tapping the personnel-cost bucket; exploring RIFs should be a “last resort.” Once it becomes clear lay-offs are coming, morale tends to slip as does productivity. This is particularly difficult at a startup where things tend to be smaller and feel more personal. Some general tips:

See if you can move people into contract work. A reduction in income is better than no income at all and contract work can help continue to move the ball forward for your company.
If the rough patch is relatively short term (ie line of sight to a cash injection), offer employees a furlough option but be realistic about the potential timeline for re-hire.
Be very clear with supervisors/ managers about how RIFs are communicated and messaged when they start happening. Consistency in messaging and empathy in delivery is critical. This will be a high stress time for many so be prepared for some challenging conversations and lots of emotional strain.
Be careful about how you are thinking about organizational structure. A spans and layers analysis can help identify areas of opportunity. Aim to maintain ~8:1 ratio on the “span” side and don’t remove more than 1 managerial layer within a function or BU or you risk destabilizing that part of the org.
Don’t assume your top employees will be thankful to have a job and just stick around. Some will flee for more stable environments outside the startup world. Hold 1:1 meetings with everyone and communicate your commitment to star performers. Highlight the opportunities to take on more responsibility and consider granting more stock in the absence of cash for bonuses / salary increases.

7. Remember the good times will come back: Keep in mind that recessions are temporary and your short-term goal as founder/CEO right now is to “just survive.” But eventually things will pick back up. Customers will return and the momentum will swing back in your favor. When this happens, you will want to be in a position to seize the moment and bounce back in full strength. Having a bit of foresight to “see around the corner” and prepare for that moment will help you return in full force.

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Additional Resources by Topic

In the last few weeks, there have been some really great resources that have come out on topics related to the coronavirus, navigating the pending recession and how to move forward during these difficult times as a founder. Below is an aggregated list of resources worth reading by topic.

General Coronavirus (COVID-19)Information

Latest dashboard on COVID-19 reported cases (Johns Hopkins)
Coronavirus guide and latest updates (Center for Disease Control and Prevention)
Why outbreaks like coronavirus spread exponentially, and how to “flatten the curve” (Washington Post)
Coronavirus: Why you must act now (Tomas Pueyo)

HR & People Management Resources

Lattice COVID-19 Response Protocol (Lattice)
Stop the Spread — startup leader’s commitment to fight COVID-19 (Ken Chenault & Rachel Carlson)
A Guide to Managing Your (Newly) Remote Workers (HBR)
15 Tips for Working from Home During Coronavirus (Quartet Health)
Working From Home Without Childcare: We Can Do It! (x.ai)

General Advice on Downturns

Coronavirus: The Black Swan of 2020 (Sequoia)
The good SaaS times will end and challenges are coming (Eric Byrne)
Funding in the Time of Coronavirus (Mark Suster)
Happy Talk versus Hard Talk (David Sacks)
A Founder’s Guide to Recession Planning for Startups (Schwark Satyavolu)
What it was like in ’08-’09, what we can learn for ’20 (Nick Mehta, Jason Lemkin)

Tools for Planning in a Downturn

Redpoint Growth Rate Estimator (Tomasz Tunguz)
Operating Expense Benchmarks for SaaS Startups (S&M, R&D, G&A) (Parsa Saljoughian)

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Here’s to hoping that this downturn is as short-lived as possible and the roaring ‘20s come back in full force quickly! If you have additional resources I should add to the list above, send them my way and I will make every attempt to keep this list current.

Social Practices and New Media (Mobile)

The cartoon above seems to get straight to the heart of much of Lee Humphrey’s research on social interaction in today’s wireless era. When we interact with others whether face-to-face (as in the case of the man and chicken above), via computer mediated communication (like in Hancock’s study on butler lies in Instant Messaging) or by telephone (as in Humphrey’s study of caller interaction), we are constantly looking for ways to avoid awkward situations, feelings of vulnerability or having our private space violated. This is particularly true when two individuals are dialoguing face to face and are suddenly interrupted because one individual receives a phone call.

The Situation

This past Sunday I was hard at work assisting an entrepreneur I’ve been in touch with for some time now with some basic product development. My two housemates, Tim and Andy, had just returned from a dinner run with subs and chips and were munching away at their sandwiches while having a heated debate over where we should all go for our next break. Suddenly, Tim received a call from his cousin. The phone conversation lasted approximately five minutes during which time Andy increasingly became more and more uncomfortable. At first he simply gnawed away at his sandwich while pretending to ignore the phone conversation. After a few minutes of restlessly rapping his knuckles on a coffee table Andy flipped on the television set in the room and started watching ESPN until Tim finished his phone call.

Analysis

Before Tim’ received the call from his cousin, he and Andy were both withs. As such they had been giving their full attention to each other and the debate at hand: vacation plans. Together they had a common identity or purpose which helped them avoid feeling vulnerable despite the fact that they were in a public place. However, the moment Tim received the call from his cousin on his cell phone, the relationship changed. Andy quickly became a single and Tim became a “with” with his cousin who was on the phone.

As a result, Andy began to feel awkward and vulnerable. Because of these feelings of awkwardness and vulnerability, Andy tried very hard to do several things. First, he tried to pretend that he was not listening to Tim’s conversation. This could be seen by the fact that he oriented his body away from Tim in an effort to give James more privacy. The second thing Andy did was to attempt to appear occupied. He first preoccupied himself by ravenously downing his sub and then moved on to watching television. Both of these actions were attempts to appear occupied and socially adept.

Applicability of Identified Social Practices

In her work on social interaction in the wireless era, Lee Humphreys identifies a number of social practices—many of which still apply today. Caller hegemony—or the idea that the person making the phone call has power over the call recipient is still prevalent. This is primarily true because the caller has all the information on why the call is being made and what the topic of discussion is going to be. Nevertheless, the rise of caller ID has taken away some of that power as the recipient now at least has an idea of where the incoming call is coming from.

The rise of texting is an even larger break from the social practices identified by Humphrey. It is becoming more of a social norm to carry on a text message conversation while interacting with someone completely different face to face. This is a result of the fact that text message conversations require less time and energy on behalf of the texter relative to a phone-to-phone converser. Thus, an individual can potentially be a “with” with a face-to-face entity and a CMC entity simultaneously. This is especially true if one is good at multitasking.

Facebook Groups: Bringing People Together

Does anyone remember one of facebook’s hallmark features: the facebook group? I know this app is a thing of the past, but it’s worth mentioning for a couple of reasons.

In his publication on groupware and social dynamics in 1994, Jonathan Grudin argues that there are eight major challenges that developers of technology applications seeking to create better virtual spaces for collaboration must overcome. Since 1994 developers have to a large extent overcome many of these challenges. And while there still remain many problems with virtual groupware, technology and groupware development have improved tremendously. No where is this better seen than in Facebook’s old groups feature. Facebook groups addressed the problems of critical mass and the prisoner’s dilemma, disparity in work and benefit and unobtrusive accessibility. However, at the time Facebook still needed to improve on exception handling. I will be using the “No Cornellian in Poverty” group that was formed several years a year ago as a running example to illustrate these concepts.

1) Critical mass and the Prisoner’s Dilemma: According to Grudin, one of the biggest issues with groupware is that it does not always enlist the critical mass of users required to be useful to the individual user. Facebook groups addressed this problem by creating a social setting online where a user’s existing social network is mapped out online. Currently there are more than 700 million users on facebook using the site on a consistent basis to interact with people who are important to them. Especially in younger generations, many users have accepted a vast majority of their friends as “facebook friends.” So when it comes time to form a group, whether it be for a cause like the group used in this blog, or about anything else the existing critical mass is already there to form the group. “No Cornellian in Poverty” had over 450 members in the group from an admin list of 3 people—and this was well over a year after the group was formed. Clearly facebook groups had tremendous success at acquiring critical mass.

2) Disparity in Work and Benefit: Another one of Grudin’s concerns with groupware applications is that they often require additional work from individuals who do not perceive a direct benefit from the work that they put in. The Facebook Groups application overcame this challenge by making it really easy to set up a Facebook group. Utilizing drop down menus, auto-fill features, radio buttons and text boxes, users of the Facebook group application could set up their group in a matter of minutes and then invite all their friends to join. The small amount of work is definitely worth the reward of garnering attention to or facilitating discussion about the Facebook group.

3) Unobtrusive Accessibility: In his paper, Grudin states that groupware ought to ensure that features that support group processes are used relatively infrequently in comparison to more heavily used features. The beauty of facebook is that it gives individual users control over the quantity and nature of information they receive via email from the group. For example, some users may find the “discussion board” useful whereas others may find the “links” useful. In either case, a user can go into the group’s settings and customize the type and quantity of emails he or she receives from the group. This allows for the application to be less obtrusive.

4) Exception Handling: Grudin argues that groupware should be able to handle a wide range of exceptions as well as be conducive to improvisation. Herein lies the one flaw with Facebook groups—it simply wasn’t built to handle exceptions. There are a whole range of types of groups and features that facebook groups never had. This includes features like: uploading documents, synchronizing calendars of members, communicating via video chat within the group, sending out mass text messages, etc,. There are definitely a number of exceptions that facebook simply wasn’t ready to handle at the time

Nevertheless Facebook groups made a number of important strides towards overcoming Grudin’s challenges for developers. Despite having difficulty with handling exceptions, it obtained the necessary critical mass, eliminated the disparity between work and benefit and made accessibility far less obtrusive. This progress seems to suggest that slowly groupware will eliminate all the challenges that Grudin presents, making virtual collaboration as efficient and beneficial as face-to-face interaction. Yet we ought to be a little more reserved in our optimism. After all there seems to be an inherent and irreplaceable value to personal interaction. Are we then chasing an illusive goal or trying to conquer the unconquerable? It seems that only time will tell that tale.

Lessons Learned

Being a young entrepreneur has many advantages. Students generally have fewer financial obligations and are able to take more risks. In addition, students often have more opportunities that stem from being in the university environment. Such opportunities include access to knowledgeable professors and relationships with other intelligent students. But today, I’d like to talk about several of the problems related to being a young entrepreneur.

Let’s turn back the pages of Cornell history to 1994 and examine a case of particular relevance to Cornell. That year two computer science students named Stephan Paternot and Todd Krizelman founded a primitive social networking site that would later be known as theGlobe.com. The company was an instant success and in 1998 it attracted a lot of attention by posting the largest IPO gains of any company in history up to that date. At the age of 23, Paternot and Krizelman were valued at $100 million each.

Yet the fame and success these youths acquired soon attracted a lot of criticism from the media. In 1999, CNN filmed Paternot dancing on a table with model Jennifer Medley in a Manhattan night club saying, “Got the girl. Got the money. Now I’m ready to live a disgusting, frivolous life.” Unfortunately, things did not stay so perfect for Paternot. 1999 was the year of the dot com bust and shares of theGlobe.com dropped from a high of $97 to less than a dime. The two young entrepreneurs lost all of their money and faded out of the spotlight. The following year, Paternot and Krizelman were forced out of the company—a sad ending to a story-book beginning.

Tales like these of young entrepreneurs experiencing massive failures are all too common. And when it happens, the ending is never good. There is just something to be said about age and the experience that comes with it. It’s simply not enough to just have the technical talent or the strong work ethic to make a startup succeed. Often you need the wisdom of those who have already done what you have done. So finding the right mentor—whether it be a faculty advisor or a parent or a close friend—is essential to navigating the unfamiliar territory of entrepreneurship and enterprise.

Interested in hearing more about mentoring? Check out the eClips theme where Entrepreneurs Discuss the Role of Mentors