Action Today for CFO’s

Jeff Epstein is on the board of Shutterstock, Twilio, Kaiser Permanente, and was the CFO of Oracle, DoubleClick, Nielsen and King World and is an operating partner at Bessemer Venture Partners. He teaches the Lean LaunchPad class at Stanford with me. And the minute he talks about financing I shut up and take notes.

He sent this message to the CFOs of his companies yesterday.
(Read it along with yesterdays survival strategy advice to CEOs.)

I thought it was important enough to share it with all of you.


Action This Day
Our first priority is the health and safety of our families, employees, customers and communities.

As CFOs, our next key priority is preserving cash.

For immediate action:
1. Evaluate your liquidity and likely cash out date under your worst-case scenario.
2. Objective: minimum of 18 months of cash. 24 months is better.

If you have more than 24 months, congratulations.

If not, take action now.

  1. Draw down all debt commitments. It’s like buying insurance. There’s a cost, but it’s worth it if things get worse. Ask existing and new lenders for additional funding.
  2. Make a list of all vendors, by $ spend amount. Call all large vendors and ask for lower prices. If appropriate, offer to sign a longer agreement in exchange for lower cash payments in 2020 and 2021.
  3. Review all marketing programs. Cut marketing by x%.
  4. Payroll costs are probably your largest cost item. If necessary, you may need to take action. Choices include:
    • Hiring freeze
    • Layoffs.
    • Cut all salaries by 20%. Cut CXO salaries by 30%. Award equity to employees equal to the value of their reduced salaries.
  5. Some of your customers will delay paying you; some will default. Credit card customers will dispute charges leading to chargebacks to you. Monitor collections and chargebacks frequently. Develop a playbook for mitigation.
  6. If you own bonds or other investments, review them for risk. Some companies, and perhaps some governments, may default.
  7. Because events are changing so quickly, have your CEO consider sending a short weekly email to your Board with any updates.
  8. Call if you’d like a sounding board to discuss the decisions you’re considering.

Most of all, stay safe.

Jeff

The Virus Survival Strategy For Your Startup

“Winter is coming.”

This is the one blog post that I hope I’m completely wrong about.

With the Covid-19 virus a worldwide pandemic, if you’re leading any startup or small business, you have to be asking yourself, “What’s Plan B? And what’s in my lifeboat?”

Here are a few thoughts about operating in uncertainty in a pandemic.


Impact
Social isolation and a declared national emergency have had an immediate impact on industries that cluster people; conferences, trade shows, airlines/cruise ships and all types of travel, the hospitability industry, sporting events, theater and movies, restaurants and schools. Large companies are sending employees to work at home. Large retail chains are shutting down their stores. While the impact on small businesses and workers in the “gig-economy” hasn’t made the news, it will be worse for them. They have fewer cash reserves and less margin of error for managing sudden downturns. The ripple and feedback effect of all of these closures will have a major impact on our economy, as each industry that gets impacted puts people out of work, and those laid off workers don’t buy products and services.

It’s no longer business as usual for the rest of the economy. In fact, shutting down the economy for a pandemic has never happened. Millions of jobs may be lost in the next few months, as entire industries get devastated, something not seen since the Great Depression of 1929-39. I hope that I’m very wrong, but the impact of this virus social and economic effects are likely to be profound, and will change how we shop, travel and work for years.

If you’re running a startup or small business, your first priority (after your family) is keeping your employees and customers safe. But next the question is, ‘What happens to my business?”

The questions every startup or small business CEO needs to ask now are:

  • What’s my Burn Rate and Runway?
  • What does your new business model look like?
  • Is this a three-month, one-year or a three-year problem?
  • What will my investors do?

Burn Rate and Runway
To answer the first question, take stock of your current gross burn rate i.e. how much cash are you spending each month. How much are fixed expenses (those you can’t change, i.e. rent?) And how much are variable expenses (salaries, consultants, commission, travel, AWS/Azure charges, supplies, etc.?)

Next, take a look at your actual revenue each month – not forecast, but real revenue coming in each month. If you’re an early stage company, that number may be zero.

Subtract your monthly gross burn rate from your monthly revenue to get your net burn rate. If you’re making more money than you’re spending, you have positive cash flow. If you’re a startup and have less revenue than your expenses, that number is negative and represents the amount of money your company loses (“burns”) each month. Now take a look at your bank account. See how many months your company can survive burning that amount of cash each month. This is your runway –  the amount of time your company has before it runs out of money. This math works in a normal market…

The World Turned Upside Down
Unfortunately, it’s no longer a normal market.

  • All your assumptions about customers, sales cycle and most importantly, revenue, burn rate and runway are no longer true.
  • If you’re a startup, you’ve likely calculated your runway to last until you raise your next round of funding. Assuming there was going to be a next round. That may be no longer true.

What does my business model look like now?
Since the world today is no longer the same as it was a month ago, and likely will be worse a month from now, if your business model today looks the same as it did at the beginning of the month, you’re in denial – and possibly out of business.

It’s the nature of startup CEOs to be optimistic, however you need to quickly test your assumptions about customers and revenue. If you are selling to businesses (a B-to-B market) have your customers’ sales dropped? Are your customers closing for the next few weeks? Laying off people? If so, whatever revenue forecast and sales cycle estimates you had are no longer valid. If you’re selling directly to consumers (a B-to-C market,) were you in a multi-sided market (consumers use the product, but others pay you for their eyeballs/data?) Are those assumptions about payers still correct? How do you know?

What are the new financial metrics? Receivables – get on top of them. Days of cash left?

You need to figure out your actual burn rate and runway in this new environment now.

Is this a three-month, one-year, or a three-year problem?
Next, you need to take a deep breath and ask, Is this a three-month problem, a one-year problem or a three-year problem? Are the shutdowns of businesses going to be a temporary blip in the economy or will they drive the U.S. and Europe into a long recession?

If it’s just three-months, (looking more unlikely by the day) then an immediate freeze on variable spending (hires, marketing, travel, etc.) is in order. But if the effects are going to reverberate in the economy longer, you need to start reconfiguring your business. You need a lifeboat strategy. That’s a fancy phrase for figuring out what are minimal things you need to keep your company alive and what to leave behind.

A one-year problem means taking a knife to your burn rate (layoffs and elimination of perks and programs to reduce your variable expenses,) renegotiating what previously seemed liked fixed expenses (rent, equipment lease payments, etc.) and putting only the essential elements for survival in the lifeboat.

[Update: Read the detailed financial advice to CFO’s here.]

If you were selling online versus in-person, you may have an advantage (assuming your customers are still there.) Or you change sales strategy.

Whatever your product/market fit was last month it’s no longer true and needs to change to meet the new normal. Does this open new value propositions or kill others? Alter the product?

And if it’s a three-year problem? Then not only do you need to jettison everything that isn’t essential for survival, it probably requires a new business model. In the short term, explore if some part of your business model can be oriented around the new rules of social isolation. Can your product be sold, delivered or produced online? Does it have some benefits if delivered that way? (See the advice from Sequoia Capital here.) If not, can your product/service be positioned as a lifeboat for others to ride out the downturn?

Leadership – Plan, Communicate and Act with Compassion
Revise your sales revenue goals, product timelines and create a new business model and operating plan – and communicate them clearly to your investors and then to your employees. Keep people focused on an achievable plan that they clearly understand. From the perspective of having lived through the last three crashes, I’ve observed the biggest mistake CEO’s made was not making draconian cuts to expenses quickly enough. They dripped out layoffs and cuts holding on to favored projects with magical thinking that somehow this was just something that would pass.  You need to act now.

If you’re in a large company considering layoffs, the first option should be to cut the salaries of the higher paid exec/employees to try to keep the people who can least afford it, employed. (Good things will come to CEOs who first try to save everyone on the ship before they jump in the lifeboat.) If/when people need to be laid off, do it with compassion. Offer extra compensation. If in the worst case you see you’re running out of cash, under no circumstances run it down to zero. Do the right thing and have enough cash on hand to offer everyone at least two weeks or more of pay.

Your Investors
One of the key elements of survival is access to capital. As a startup or small business you should realize your investors are also asking themselves how this pandemic will affect their business model. The cold hard truth is that in a crash VC’s are running their own “What do I save in the lifeboat?” exercise. They triage their deals –  first worrying about liquidity of their late stage deals which have the highest valuations. These startups typically have very high burn rates and funding for those could fall off a cliff. You and the survival of your startup may no longer be their priority and your interests are no longer aligned. (VC’s who tell you otherwise are either naïve, lying through their teeth, or not serving the interests of their investors.) In every major downturn inflated valuations disappear and the few VC’s still writing new checks find it’s a buyer’s market. (Hence the term “Vulture Capitalists.”)

Some investors have only lived in a booming market when valuations only went up and investment capital was plentiful. But investors with grey hair can remember the nuclear winter after the past recessions of 2000 and 2008 and can offer some historical patterns of crashes and recovery to CEOs running early stage startups – some who weren’t born when the crash of 1987 hit, were 10 years old in the crash of 2000 and 18 in the last crash of 2008. Keep in mind, that today’s circumstances are different. This isn’t a bear stock market. This is a conscious shutdown of most of our economy, trading jobs for saving hundreds of thousands of lives, that’s causing a bear market and a likely recession.

Data from the last large crash in 2008 had seed rounds recovering early, but later stage funding cratered and took years to recover. (see the figure below showing quarterly VC investments before and after this crash – part of this post from Tomasz Tunguz.)

This time around, the health of the venture business may depend on what hedge funds, investment banks, private equity firms, sovereign wealth funds, and large secondary market groups do. If they pull back, there will be a liquidity crunch for later stage startups (Series B, C…). For all startups in the short term, the deal terms and valuations will get worse, and there will be fewer investors looking at your deal.

As a startup CEO you need to know if your board is going to be screaming at you for not radically cutting burn rate and coming up with a new business model or, will they be yelling at you to stop being distracted and stay the course?

And if the latter, I’d want to know what skin in the game they have, if they’re wrong. It’s pretty easy for VC’s to tell you that they’ll be right behind you when you’ll need a next round, until they’re not. Unless your investors are matching their orders for “full speed ahead” with a deposit into your bank, now is not the time to be railroaded into a burn rate that is unrecoverable.

Prepare for a long cold winter.

But remember no winter lasts forever and in it smart founders and VCs will be planting the seeds for the next generation of startups.

Lessons Learned

  • This is a conscious shutdown of our economy, trading jobs for saving hundreds of thousands of lives
  • It’s likely going to cause a recession
  • The Covid-19 virus will change how we shop, travel and work for at least a year and likely three
  • It’s inconceivable that you can have the same business model today as you did 30-days ago
  • Put in place lifeboat plans for three-month, one- year and three year downturns
  • Recognize that your investors will act in their interests, which may no longer be yours
  • Take action now
  • But act with compassion

You’re Not Important to Me but I Want To Meet With You

If you’re a busy startup founder, you’re likely delegating the task of scheduling key meetings about things you want/need to your admin. This is a mistake.

That’s because the dialog you have in setting up the meeting is actually the first part of your meeting, not some clerical task. Treat it this way and you’re much more likely to achieve the objective you’re hoping to. Here’s why:


A few weeks ago I got an email from a VC friend asking me to talk to a founder at one of his startups. The founder had sent him a note, “We’d love to partner with Steve on getting his frameworks and templates from his books – The Four Steps and The Startup Owner’s Manual – onto our product. Can you connect us to him?”

I told the VC, of course, and sent an email to the founder suggesting a couple of dates.

In response I got an email from him telling me how busy he was, but his admin would coordinate some dates for us…

If this doesn’t strike you as a red flag of a relationship that was broken before it started, and an opportunity wasted, let me point out what went wrong.

Who’s Doing the Ask?
Outside of a company there are two types of meetings; 1) When you want something from someone, 2) When they need something from you.  This meeting fell into the second category – a founder wanted something from me and wanted my time to convince me to give it to him. Turning the scheduling over to an admin might seem like an efficient move, but it isn’t.

What Message Are You Sending?
A startup CEO handing me off to an admin sent a few signals.

First, that whatever his ask was really wasn’t that urgent or important to him. Second, that he didn’t think there was any value in forming a relationship before we met.  And finally, that he hadn’t figured out that gathering data in premeeting dialog could help him achieve his objective.

Instead, skipping the one-on-one dialog of personally setting up the meeting signaled to me that our meeting was simply going to be a transactional ask that wasn’t worth any upfront investment of his time.

Why, then, would meeting be worth my time?

What Gets Missed
When I was in startup, I treated every pre-meeting email/phone call as an opportunity for customer discovery. If I wanted something from someone – an order, financing, partnership, etc., I worked hard to do my homework and prepare for the meeting.  And that preparation went beyond just finding mutually agreeable meeting times.

 Early on in my career I realized that I could I learn lots of information from the premeeting dialog. That initial email dialog formed the basis of opening the conversation and establishing a minimum of social connectivitywhen we did meet.

I always managed to interject a casual set of questions when I was setting up a meeting. “What type of food do you like? Do you have a favorite restaurant/location?” If they were going be out of town for a while, ask if are they traveling on vacation? If so, ask “where?” And talk about the vacation.  And most importantly, it allowed me to confirm the agenda, “I’d like to talk about what our company is up to…” and telegraph some or all of the ask, “and what to see if I can get ….” Sometimes this back and forth allowed both of us to skip the meeting completely and I got what I wanted with a simple email ask. Other times it laid the foundation for an ongoing business relationship.

The key difference with this approach is in understanding that the dialog in setting up the meeting is actually the first part of your meeting.

Of course, in a company with 1,000s of people, it’s possible that the CEO is too busy to get on email or to call someone whose time he wants for every meeting. However, CEOs of major corporations who are winners will get on the phone or send a personal email when there’s something that they want to make happen.

Lessons Learned

  • The dialog in setting up the meeting is actually the first part of your meeting
  • Don’t miss the opportunity
  • If you want something from someone, don’t outsource scheduling your meeting
%d bloggers like this: