[Editor’s Note: One of the benefits of inviting guest columnists from the business community is the ability to present first-hand accounts of their experiences (good and bad) — and the lessons they’ve learned. Below, venture capitalist and founder of user-generated media startup Pinnacle Systems, Ajay Chopra, digs into his personal history with economic downturns to offer a candid executive survival guide.]
Having raised initial rounds of financing, many startup CEOs are needing to find ways to survive with no venture infusion on the horizon. In my previous life, I was one of these guys, growing my company, Pinnacle Systems, from startup stage to IPO through three economic downturns. As you can imagine, I learned some valuable lessons — oftentimes the hard way. Because I’ve sat in that founder seat before and respect the challenges and tough decisions many of you are facing, I wanted to offer the wisdom from my experience in an effort to help.
1. Laser focus your team behind a single, clear goal — and communicate it crisply.
A few years after its inception, my fledgling startup faced a life-threatening challenge. The economy was in recession, and another large player in the market introduced a competitive product that tanked our sales. We had to rethink everything. There wasn’t enough cash to sustain our current business and produce a response to our rival. So we took a risk, putting all our resources behind a competitive response at the expense of all other efforts.
This clear focus, coupled with team spirit (and perhaps a little desperation), drove us to deliver arguably the most significant product in the life of the company. And it was this product that eventually led us to an IPO. In times like these, when you don’t have the luxury of experimenting with multiple ideas, singular focus is vital. Once you know what that focus is, communicate it to your team in simple terms. Those that are on board get to stick around; those that aren’t should be asked to clean out their desks.
2. Devise a survival plan — and track it carefully.
Based on the goal you identify in step 1, develop an honest and conservative financial plan. This is your survival plan, which should ideally drive you to break even without any further financing. If that’s not possible, calculate the minimum additional capital you’ll need to break even. This plan will guide all of your other decisions — where to spend money, which team members are critical, etc. Question your assumptions and be as conservative as possible. In my experience, these are probably the most realistic plans ever conceived by most CEOs — probably because they know they can’t afford to be wrong.
3. If you need to cut headcount, cut early, cut once and cut deep.
Layoffs are much tougher at startups where early employees are usually close friends. It’s easy for young execs to get overwhelmed by the sense of failure they signify. One year after my company completed its first round of funding, it became clear that we had expanded our employee base too fast. I decided to cut costs, but, in retrospect, went about it the wrong way. I didn’t have a survival plan. Instead, I naively estimated that I should cut headcount by 20 percent. That turned out to be far from enough, and the next six months saw three increasingly traumatic waves of layoffs. By the time I was done, we were down to 50 percent of the original staff.
As I look back on that period, I realize that emotions got in the way of clear decision making. I was hoping to escape with minimal pain and guilt. But hope is not a strategy — and my approach had the opposite effect on the team. My leadership was questioned by the very same folks I was trying so hard to protect. I didn’t realize that slow-burn layoffs can demoralize a team and chase top performers out the door. CEOs need to have enough confidence and information at hand to make one firm sweep of cuts and to promise remaining teammates that no one else will be affected. This’s what builds loyalty and rallies troops.
4. Cash is king — remember the only way companies go bankrupt is by running out of dough.
Many a savvy CEO survived the dot-com crash by hunkering down and emerging as the last man standing in their particular space. They won by default because they didn’t run out of money. In a downturn, cashflow management is far more critical than revenue growth. You could consider stretching your payables, or urging your customers to pay early, for example.
Mostly, though, there’s the cost cutting. Non-payroll expenses add up. Now might be a good time to look through every check your company wrote over the past quarter. You’ll be surprised to see how many opportunities to save you’ll identify. One technique I highly recommend: discuss departmental expenses in detail during weekly staff meetings. This way, managing cash won’t fall exclusively on the CFO’s shoulders.
If things are still looking grim, it might be a good idea to look at all avenues of fund raising. Maybe your investors would be willing to back you with an inside financing round subject to progress on a particular plan or product. You might be able to negotiate an extended payment schedule on any venture debt or lease line you have. And if all else fails, you can always go knocking on the doors of larger companies in your market segment who might think now is an opportune time to take a strategic equity investment in your startup. This can be a good way to snag extra capital (if the deal is structured favorably).
5. Be intellectually honest with yourself, your team and your partners — practice what you preach.
In a recent talk at my current employer, Trinity Ventures, Joel Peterson (noted Stanford business professor and management guru) summarized this point succinctly: “Trust is a precious currency, especially when times are tough.” In fact, it might even be easier to reinforce trust in difficult times. Back when I decided to reduce headcount at Pinnacle, we simultaneously instituted substantial salary cuts for executive staff members. Sharing the pain is an important gesture (and also helps save, incidentally).
6. Be positive.
During another tough period, the vice president of sales at Pinnacle installed a “new order bell” in the main office area. Whenever a big order came in, we would ring the bell and cheers would ripple down the hall. Soon the bell was ringing more and more frequently. It turned out to be a very simple, yet effective way to communicate. It required no words, and resuscitated our progress.
I know that much of the above might sound like common sense, but you’d be surprised by how many business leaders have been taken down because they neglected the basics. One would be hard pressed to name a successful, or even sustainable enterprise that hasn’t had to weather a downturn. Good leadership during bad times mean taking prudent steps toward not only fortifying an organization, but also positioning it well for when things start looking up.
Ajay Chopra is currently general partner at Trinity Ventures where he focuses on digital media, Internet services and mobility solutions. Before that, he cofounded Pinnacle Systems, a consumer-generated media company that grew from a startup into a $350 million public company. He invites you to further discuss the issues raised in this column. You can reach him at email@example.com.