How to survive a rip
tide • Rip tides are long, narrow bands of water that quickly pull any objects in them away from shore and out to sea. • They are dangerous, but are relatively easy to escape if you stay calm. • Do not struggle against the current. Most riptide deaths are not caused by the tides themselves. People often become exhausted struggling against the current, and cannot make it back to shore. • Do not swim toward shore. You will be fighting the current, and you will lose. • Swim parallel to shore, across the current. Generally speaking, a riptide is less than 100 ft. wide, so swimming beyond it should not be too difficult. • If you cannot swim out of the riptide, float on your back and allow the riptide to take you away from shore until you are beyond the pull of the current. Rip tides generally subside 50 to 100 yards from shore. Once the riptide subsides, swim parallel to shore and then back to shore. Source: Popular Mechanics, December 2003, “Worse-case scenarios: How to Survive a Riptide”
Foreword • Many of the
suggestions contained in this presentation were made in previous works • Unfortunately, however, some of the concepts are hard to grasp and, as a result, have yet to sink in • The purpose of this guide is to elaborate on certain key points and reiterate their importance • Hopefully, this will help entrepreneurs and CEOs absorb the suggestions and be in a better position to execute upon them
You are facing a new
opponent • In boxing, you change your strategy according to the characteristics of your opponent. • When you are fighting an opponent who has a longer reach than you, the secret is to get inside because it removes his or her reach advantage. • Conversely, when you are fighting an opponent who has a shorter reach, the secret is to leverage your reach advantage by picking him or her apart from the outside. • What has happened in recent months is that your opponent has changed. • Whereas nine months ago, your opponent was a rival venture-backed company, your new rival is the economy. • Since you are facing a new opponent, you need to change your strategy. • Nine months ago, the way you defeated your opponent was by being first to market and acquiring a critical mass of users, but the characteristics of your new opponent are different, requiring a new approach. • The secret to defeating this opponent, is to win by attrition. • Don’t slug it out toe-to-toe, conserve your energy and defeat your opponent by outlasting him.
In case it wasn’t clear…
• We are in a new environment • The new environment necessitates a change in strategy • Rather than being first to market or amassing users, your new goal should be to avoid running out of money
Goals Yesterday Today (1) Avoid
running out of $ (1) Be first to market (2) Avoid running out of $ (2) Gain critical mass (3) Avoid running out of $ (4) Avoid running out of $ (5) Avoid running out of $ (6) Avoid running out of $ (7) Avoid running out of $ (8) Avoid running out of $ (9) Be first to market (10) Gain critical mass
Guiding principle • As CEO,
you and your team need to pursue this goal with the same zeal, creativity, and enthusiasm that you once directed toward being first to market and gaining users.
What to do: • Understand
what is happening • Figure out how it will impact your company • Adapt to the new environment • Execute
What NOT to do: •
freeze • get depressed • panic • act rashly • lose your moral compass • give up
Giving up • In his
book, “A Life Decoded”, Synthetic Genomics founder, J. Craig Venter, tells a story about how, when he was working as a medic in Vietnam, patients who were gravely wounded would sometimes live beyond anyone's expectations, while patients who should have recovered, would sometimes give up and die. • Venter uses the example to illustrate his belief in the strength of willpower and the human spirit, but this is also an apt metaphor for entrepreneurs. • Specifically, those who fight, can beat the odds and survive, while those who give up, perish. • So, don’t give up, keep fighting!
Understand what is going on:
• For an excellent explanation of what is going on and how it happened, read the Sequoia and Mary Meeker presentations, or the Bill Gurley memo, links to which are appended hereto.
Likely effects of the crisis
• Radically lower consumer spending • Dramatically lower corporate spending • Less access to capital • Lower valuations • Longer time to liquidity
How will the crisis effect
you? • How will the economy effect your customers? • How will changes in your customers’ spending effect your company?
What works in this environment?
• Target products or services which: – Reduce expenses – Increase revenues – Allow customers to do more with their existing infrastructure – Do not require your customers to make a large upfront investment
Example: EnerNOC • Utility infrastructure
in the US dates from the 1950’s • EnerNOC uses cognitive computing to, among other things, optimize the flow of electricity over the grid • This allows utilities to offer new services and get more out of their existing physical infrastructure without having to invest in costly new capital expenditures • Saves customers money in concrete ways and generates additional revenue opportunities without requiring radical upfront investment
Renew focus on demand •
Focus on customer demand: what can your customers absolutely not live without (as opposed to something that would merely add some marginal value)
Important questions to ask •
Does my customer need my product or service? • Do they have the money to pay for it? • Is there a customer who will purchase my product or service independent of what is happening in the economy? • Focus on clients that will spend money no matter what, ex. During the last downturn, IDEO shifted from providing services to Fortune 500 companies, to NASA.
Assess current financial position* •
How much cash do you have in the bank? • What is the burn rate? • How long is the runway (months of cash)? • How many months until break-even? * Please note that these are facts, not variables.
A note regarding self diagnosis
• Be realistic and brutally honest • Environment has changed dramatically, assumptions must also change • Don’t hold onto old assumptions, throw them out and start again from scratch • Revisit all assumptions and submit them to a stress test (challenge your assumptions) • Beware self-deception and rationalization
Self diagnosis • Does the
company’s business proposition still make sense given the new environment? • If not, what can you do to change it? • Are you doing everything that you can to focus? • Are there initiatives that no longer make sense? • Are you a platform or a feature? (Be honest!) • Should you merge with another company? • Should you shut the company down?
Execution • Once you have
finished the diagnosis, time to execute • Act decisively, but use considered action • Avoid knee-jerk reactions • Make cuts all at once, don’t stagger them (seriatum cuts kill morale and destroy momentum) • Recognize your limitations, are you capable of doing what is required? If not, find someone who is.
Be a leader • Your
employees, customers, and investors are counting on you • Now is the time to lead • Be flexible and adapt • Exercise discipline • Make the hard decisions • Take charge of the situation, don’t let the situation take charge of you!
Cost containment* • Go through
your budget line by line • Where possible, shift from fixed to variable costs • Try to reduce recurring costs like rent, salaries, utilities, phone, G&A expenses, etc. • Negotiate reductions with your vendors and service providers, barter • Avoid entering into long term contracts, where possible, as prices will likely fall • Share facilities and other resources • Don’t spend money until you absolutely must * Some people are great at this, if you aren’t, find someone who is
Labor • Get creative with
compensation strategies (shift salaries from fixed to variable, cut base and increase performance-based component) • Tie hiring to milestones on the sales side • Don’t hire in anticipation of growth, grow, then hire • Ask employees to voluntarily take reductions • Review whether positions are part-time or full-time • Explore alternatives like outsourcing
A painful challenge • Entrepreneurs
are in the business to build companies, not reduce them. • Reducing a company--whether headcount or product lines--is one of the most painful challenges an entrepreneur ever has to face • Unfortunately, in down cycles, it is often a necessary evil
Choosing who to lay off
• Drop the least productive • Let go of people who are in areas or functions that are no longer essential
Determining essential areas • Start
with the company’s core product or service and work your way backwards (remember, the product or service may have changed in light of economic conditions) • What products/services are essential? • Is this position no longer necessary? • Is this mission-critical or can it be outsourced? • Is this task better performed by a consultant?
Conducting the process • The
day before, announce that there will be an all hands meeting • Get everyone together in the morning • Explain that you are proud of everyone’s work, that the company is going to survive, but that, due to the downturn, the company needs to reduce its headcount • Tell them that you will be eliminating, ex. 15 positions
Conducting the process • Treat
employees as well as possible • Logistics of how it is done make all the difference, ex. have boxes for people to use • Figure out the migration of email, return of computers and cell phones, etc. beforehand • Make it as humane as possible • Do everything that you can to preserve dignity
Conducting the process • Inform
staff that you will be holding meetings beginning at 11 am • Ask them to please stay by their desks • Goal is to avoid people feeling angry or humiliated • Meetings should be short, 10-15 minutes max. • Don’t get into specifics • If people want to talk in detail, schedule a meeting or a call for another time • Your duty at this point is to inform those affected quickly and get it over with • Meeting participants should be the person being let go, plus three or four people • Hold the meetings quickly • Give them time to say goodbye to co-workers, pack up, and leave • Do this before lunch so you get everything done with
Conducting the process • After
lunch, once the affected employees are gone, gather everyone together again • This will not be a happy event • Be professional • Explain to everyone what happened and why • The goal is to reassure employees who remain and to restore confidence • A few days later have pizza at the office (make sure that it is not expensive, otherwise you are sending mixed messages about cutting costs), and begin to restore morale
Increasing revenues • Extremely difficult
since everyone is cutting costs • Revisit your core product or service to see if there are any ways of extracting additional revenue • Acquire customers from weaker competitors • Get creative • Partner, acquire, or merge with a company offering complementary products or services or with a complementary sales channel • In rare circumstances, consolidate and extend market share
Raising additional capital • Don’t
count on getting bailed out by future rounds of funding • Money, if it can be raised at all, will be difficult to obtain • It will take longer to raise • It will be at a lower valuation • Cost of capital has increased dramatically
Assuming that you can raise
additional capital • Raise enough to get to profitability, and perhaps more • Be prepared to demonstrate: – A track record of meeting milestones – A working, non-advertising monetization model • Show investors: – That you understand the new economic reality – That you have a clear plan to profit from it
Mergers and acquisitions • Normal
acquirers, large corporations, have their own problems • Very little credit available to finance acquisitions • Debt markets are prohibitively expensive • Public market valuations have collapsed, reducing private company valuations
What are they looking for?
• Proven sales/monetization models • Track record of hitting milestones • Crucial market share or technology • Public companies will only acquire companies that are profitable or at break-even, since they don’t want to dilute their earnings
Company image • Be proactive
in managing the company’s image, particularly if you are conducting lay- offs • Keep customers, investors, suppliers, and partners informed and address their concerns • Be careful not to send mixed signals, ex. lay people off, then Twitter or post photos on Facebook inconsistent with the gravity of the situation
Morale and motivation • Be
proactive in managing employee morale, especially in the aftermath of cuts • Share information (do not hoard it or keep employees in the dark) • Manage employees’ expectations • Redouble your efforts to cultivate a sense of camaraderie • Come up with creative (non-monetary) ways of rewarding employees
Communicate • Don’t hide problems,
delay delivering bad news, or put everything on yourself • Talk with members of your executive team, the CEOs of other start-ups, investors, and friends • There is no shame in experiencing difficulties or having questions, everyone is in the same boat • Chances are, someone has faced the problem before and knows how to help!
Moral compass • Difficult circumstances
can sometimes cause people to panic and behave in ways that they normally would not • Be careful not to lose your moral compass • If you are unsure of the morality of an act, use the New York Times test, i.e. Don’t do anything that you would not be proud to have your family, friends, and colleagues read about on the front page of the New York Times
Opportunities created by the downturn
• Increased ability to cherry-pick (recruit) the best employees, since there will be fewer companies • Chance to consolidate and extend market share by identifying competitors weakened by the crisis and acquiring their customers • Competition should revert to “normal” levels, since there will be fewer well-funded, duplicative companies
Conclusions • Entrepreneurs and CEOs
face the worst economic conditions since the Great Depression. • Those that can harness their drive and creativity to adapt and execute in this tough environment, however, will have a strong chance of not only surviving, but flourishing, once the economy turns around. • So, save your energy and swim parallel to shore!
Additional resources • Sequoia presentation:
http://www.slideshare.net/eldon/sequoia-capital-on-startups-and-the-economic-downturn-presentation?type=powerpoint • Bill Gurley memo: http://www.techcrunch.com/2008/10/09/benchmark-capital-advises-startups-to-conserve-capital/ • Ron Conway email: http://www.techcrunch.com/2008/10/08/angel-investor-ron-conway-adresses-his-portfolio-companies-over-financial-meltdown/ • PE Hub Interview, A Q&A With Silicon Valley's quot;Undertakerquot;: http://www.pehub.com/21573/a-qa-with-silicon-valleys-undertaker/ • Mary Meeker, Web 2.0 Presentation: http://www.slideshare.net/hblodget/mary-meeker-web-20-presentation-presentation?type=powerpoint • John Doerr, VentureBeat Roundtable: http://venturebeat.com/2008/10/29/john-doerr-10-ways-for-companies-to-stay-afloat-in-rough-times/ • John Borthwick memo: http://www.alleyinsider.com/2008/12/startup-advice-how-to-make-the-collapse-work-for-you • Jason Calacanis blog post: http://calacanis.com/2008/09/29/the-startup-depression/
Disclaimer • This presentation was
compiled by Simon Olson, a partner at DFJ FIR Capital, Draper Fisher Jurvetson’s Global Network partner in Brazil. All thoughts and opinions expressed herein are his own and do not reflect the thoughts or opinions of Draper Fisher Jurvetson or any of the Network Funds. Responsibility for any intelligent ideas contained herein lies with Simon’s colleagues from the DFJ Global Network who graciously contributed ideas for this presentation. Responsibility for any errors lies with Simon alone. Special thanks to Dan Miller for his insightful comments on how to conduct the layoff process.