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Resilience Spotlights: Fireside Chat with Jake Winebaum


April 22, 2020 – We recently launched our Resilience Spotlights webinar series, in which leaders share their insights and lessons learned from leading companies in previous downturns. Our first guest was Jake Winebaum, a serial entrepreneur who has led 3 companies through economic downturns. He shared his top tips to help companies navigate choppy waters:

  • History repeats itself. Learn from past recessions.
  • Plan for the worst. Hope is not a strategy.
  • Prepare a zero-base plan assuming no new capital.
  • Startups die of indigestion, not starvation. Limit company priorities.
  • Be decisive and transparent with all your stakeholders. Act now.
  • Remember that crisis can be an opportunity for the bold.

Here is a recording of the fireside chat, and below Jake shares more of the stories and tough decisions behind his journey.

Managing in a Financial Crisis

Jake Winebaum

We were flying up from Los Angeles to San Francisco on an early morning Southwest flight to close a big financing round from SoftBank. The deal terms and documents had all been finalized in advance.  That morning, Yahoo stock, SoftBank’s biggest holding, dropped 30%, marking the beginning of the 2000 dotcom crash. The brutal recession that follower over the next two years would erase 80% of the NASDAQ’s value, force an 85% decline in venture capital investment, cause the failure of over half of newly formed online enterprises, and the loss of over 200,000 jobs in Silicon Valley. When we showed up to SoftBank’s offices for the closing ceremony later that morning, a SoftBank executive met us in the lobby to tell us that the deal was off—permanently.

The echoes of 1999-2000 today are eerie. In 1999, much like 2019, the economy was booming, the stock market soaring, and venture capital was abundant. Sky Dayton and I had founded eCompanies, an internet incubator, in July 1999 with an ambitious plan to launch one company a month. By March 2000, the incubator had launched nine companies, with the expectation that there would be plenty of venture funding for both the incubator and the portfolio companies.

I remember that flight back to LAX from the SoftBank meeting so clearly 20 years later. After Sky and I emerged from our initial shock, we concluded that if SoftBank, the most prolific and successful internet investor of that time, was pulling back, other investors would as well.  We would have to survive with what remained of our existing capital. Before we had landed, we decided to shut down the incubator and distribute the remaining $5 million in capital and the key employees to the five portfolio companies we felt had the best chance of surviving: Jamdat, Boingo, Business.com, USBX and Lower My Bills.

Each of those companies would need to quickly develop a survival plan on the assumption that they would not be able to raise any additional capital for the foreseeable future. The remaining four companies were wound down with employees receiving severance and any remaining capital returned to creditors and investors.

The key executives at the incubator took operating roles at the incubator companies they had conceived and helped found and now had to quickly help them figure out how to survive the crash.  Mitch Lasky became CEO of Jamdat, the mobile gaming company, Sky as CEO of Boingo, the wireless roaming company and I assumed the role of CEO at Business.com, an ambitious internet business portal.

Business.com was burning $1 million a month and had $4 million in cash — just four months of runway. Like the incubator, they had been expecting to close a big financing round before the bottom fell out of the market.  I worked with the team to create what we called our zero-base survival plan. After carefully examining the business, we found that 80% of the site’s visits and usage was being generated by the search and directory portion of the business but producing it only represented 20% of the company’s overall cost. The content side of the business on the other hand generated 20% of the activity but represented 80% of the cost. The answer to how to reduce the burn was obvious: we had to eliminate the content side of the business.

But that move wouldn’t solve the other major problem with the business model, the CPM and sponsor-based ad business was likely to suffer badly in the recession, and it required an expensive outside salesforce.  However, we were seeing early promise in the self-serve pay-per-click business model that we were just beginning to experiment with. We decided to abandon the CPM revenue and related costs and move 100% to PPC. This pivot in the business model meant restarting the revenue at nearly $0 the first month, but with a dramatically reduced cost base and a more predictable and efficient business model.

I presented our zero-base plan to the board that week that focused the company entirely on search and directory and the PPC business model, eliminating the content side of the business. The plan dramatically simplified and streamlined the business, but it meant cutting the team from 135 to 30 employees immediately.  This was by far the most difficult decision and action of my 40-year career.  We carefully selected the core team to match the skills we needed for the go-forward search and directory business and paid a two month severance to those that had to be laid off.

By carefully following that plan and slowly rebuilding the company and the team, Business.com reached cashflow positive 2 years later. We raised a growth round with Bill Gurley at Benchmark in 2004 and sold the company in October 2007 for $350 million, just before the 2007 financial crisis began. Boingo and Jamdat underwent the same zero-base planning process, survived and then flourished. Jamdat went public in 2004 and was later bought by Electronic Arts and Boingo remains a public company today after its successful IPO.

Planning for the worst-case

I have experienced four recessions over the course of my career. The economy goes through long-term cycles of expansion and contraction.  We are just exiting one of the longest expansions in history and entering a contraction caused by a virus and an unprecedented global shut down of the economy.  The unanswerable question in the early stages of a contraction is how deep, broad and long will this contraction be? Unfortunately, unless you have massive cash reserves, you don’t have the luxury to wait for the answers to that question.  Each day that you wait, you burn cash that you will need to survive.

I recommend that CEOs and founders of young companies that are not yet cash flow positive to rapidly develop a worst-case operating plan that assumes a prolonged and deep economic contraction: that investors and lenders will be unwilling to provide any additional capital, and that existing and potential customers will be making cuts to their own spending which will make growing and even sustaining revenue difficult.

This is the zero-base planning process we used at Business.com and that I have used in two other recessions.  The plan starts with a simple but powerful assumption: you will not be able to raise additional capital and have to reach cash-flow positive with what you have in the bank today. This assumption removes many of the more hopeful planning scenarios that depend on things that are currently out of your control, such as trying to figure out when capital markets may reopen, and then managing to a “months of runway” operating plan.

Here are some recommendations when developing a zero-based plan:

  • Assume your working capital is limited to what you currently have in the bank.
  • Examine all business lines and revenue streams and identify them as either core (keep) or ancillary (kill) based on their ability to generate positive margins and cashflow. Companies typically die of indigestion, not starvation, so this is a critical time to simplify and limit your company’s priorities.
  • Be super conservative on revenue assumptions, both dollars and timing. Just like you, your existing and potential customer will be cutting costs which makes growing or acquiring new customers very difficult. Your priority is survival, not growth during the crisis.
  • Build your expense base from zero, eliminating all costs not directly contributing to growth and maintenance of the core business.
  • Audit your entire team and identify the key personnel directly related to the core business. This is the core team to get through the crisis. Grant them substantial additional equity and if you need to cut salaries, create a deferred compensation plan that will allow them to recoup lost wages in the form of equity or cash if and when the company becomes profitable.
  • If you need to lay off employees, do so in one action immediately but allow, if at all possible, two months of severance. Multiple staff reductions is death of a thousand cuts and demoralizing for both those laid off and those that remain.
  • As soon as the plan is complete—days, not weeks—review with your board for approval. Don’t sugarcoat or set false expectations.
  • Present the approved plan to employees in an all-hands being completely honest and transparent about the strategy and rationale for the plan. Don’t sugarcoat.
  • Do not waste time trying to raise money except from your existing investors.
  • Do not waste time on M&A leads if you have a viable path to profitability. The discussions will consume massive amounts of time with very low likelihood of a favorable or acceptable outcome.

Leadership in a crisis

The decisions you need to make now for your company to survive will be the most difficult of your career. You will need to reduce costs, modify strategy and, worst of all, you may need to lay off many employees that you personally hired and convinced to join you on your mission.

The operating plan that you prepare will be your blueprint for surviving the crisis. It requires complete honesty with yourself and your team about the actual health, strength and weaknesses of your business. It requires you to gain a complete understanding of your revenue drivers, your costs and how you generate positive margin and cashflow. This is your company’s moment of truth.

Does a crisis or recession mean you should be shutting down your business? Absolutely not.

If you take decisive measures today, you will greatly increase your odds of surviving this crisis. Your company and team will emerge on the other end stronger, leaner, more resilient and with far fewer competitors for customers, investment and ultimately company exits.

The pandemic and the resulting economic shutdown are an unprecedented disruptor cutting across all industries and geographies.  It is the catalyst that is rapidly changing the way we work, we play, we shop, we eat, we learn, we receive healthcare and we communicate. This will create demand for the kind of innovative new products and services that only startups  such as yours can deliver.

 

Originally published on LinkedIn.