The Days of Cheap Money Are Over

Colleagues at Endeavor hosted me for a podcast to talk about investing and operating venture backed companies during recessionary times.

Endeavor entrepreneurs and many others are experiencing the effect of high interest rates and depressed public company multiples as investor backed companies start testing the market to raise their next round of funding.

With Endeavor’s audience focused primarily on companies already in growth stage, they were specifically interested in speaking with people who had experienced multiple recessions.

Three Prior Tech Wrecking Recessions

For me, there were three distinct pullbacks driving venture investors to run for cover. Each followed a frothy VC investment period with new heights in valuations immediately preceding these resets:

  • 2000 – 2002 Dot com bust + post Sept 11 recession
  • 2008 – 2009 Real estate and financial markets crisis
  • 2020 – 2021 Initial 18+ months of Covid pandemic

I’m far from unique for having worked through each of these resets. The first two I was on the operating side of the business as CEO and Chairman at TriNet, while during the 2020 venture pullback I was on the investor side doing what I could to help UpVentures portfolio companies make hard decisions following the unexpected falling off the cliff valuation drops at the start of Covid.

Have a listen to the podcast if you’re interested in hearing more about what prompts me to think it may be a couple of years or longer before we get back to late 2021 private company valuations.

Recessions teach us that failing to recognize macro forces beyond our control can too easily result in horrific consequences to once promising companies. Much heartache can be avoided if leaders move quickly to face reality in making the hard decisions.

Whether you’re an operator or investor, if you believe “only the paranoid survive,” it’s necessary to look beyond founder optimism thinking that past momentum points towards everything just working itself out.

Got 3 Minutes? Listen to one segment

Open up the podcast here and jump to a specific topic of interest by advancing to any of the following time stamps in the podcast:

> 1:55: How is the economic outlook different today compared to a year ago? Where’s it going for VC backed companies and how long will the recession last?

> 4:00: Why public market valuations are going down and how that affects private companies seeking funding.

> 7:42: How does the current economic cycle compare to the dot-com bust of 2000/2001 as well as the 2008/2009 recession.

> 9:41: Insights from leading a company during recessionary times, including TriNet’s aborted IPO during the 2000 “dot bomb” downdraft

> 13:33: Why running a company during a recession requires Wartime Leadership that accepts macro reality, making the hard decisions and figuring out how to keep the right people you want in foxhole with you when you’re under fire

> 19:40: What investors can do to support management in making hard decisions. How management leverages data to support, track and adjust a realistic financial plan

> 22:48: Why it’s a great time to be an entrepreneur, including outside major tech hubs

> 24:31: Connecting entrepreneurs to resources is a common social impact thread across UpVentures Capital, and non profits Upstate Venture Connect, Entrepreneurs Across Borders and UpMobility Foundation

> 27:49: “Call me crazy” moment: Running as an independent candidate for U.S. Congress in 2016 and how that evolved to a committed journey inside a national movement to improve democratic processes in New York and the United States

> 29:35: Most Inspirational CEO: Jack Stack + how the Great Game of Business shaped TriNet’s trajectory

> 31:10: Best Business Advice Ever Received: From Mitch Kertzman – Not getting hung up on founder’s percentage ownership of the company

SVB Collapse a New Risk Factor

Since the podcast was recorded prior to Silicon Valley Bank’s demise, ripple effects from that closure are still unfolding. Certainly, that includes investor discovery of a new financial risk factor for the venture ecosystem further depresses valuations beyond the other recessionary factors described in the podcast.

Endeavor Helps Scale Ups

Endeavor is a non-profit leading global community of, by, and for high impact entrepreneurs.  I joined their Western NY Board of Directors last year as part of my mission in connecting high growth founders to resources they need to scale companies. Endeavor is a truly global, mature non-profit built on a Pay-it-forward ethos such as I’ve described in More Good Jobs. The Endeavor board role is helping me see best practices I hope to carry over to other non-profits I’m involved with building community like Upstate Venture Connect, Entrepreneurs Across Borders and the Seasoned Entrepreneurs Gathering Exchange.

Related posts:

Wartime Leadership Series

More Good Jobs Series

New Chapters for 2023

December 31, 2022 sunset viewed from White Street Pier, Key West

Catching a beautiful end of the year ocean sunset with my family triggered thoughts about what I would take from the year just finished. Some of those reflections were already kicking in with the first dawn of the new year.

2022 had its mix of ups and downs

Russia’s invasion of Ukraine early in the year got my attention in a big way. Many visits in prior years to my ancestral homeland of neighboring Slovakia stoked awareness and concerns – including memories from the 80’s while visiting family under Soviet subjugation. It doesn’t get grimmer than war, but Putin is only part of the alarming trend of autocracy filling voids created by failures to evolve democratic institutions.

Closer to home, the biggest chunk of my energy last year was devoted to non-partisan Unite NY seeking to build support for reforming democratic processes in New York State. This included work aimed at establishing a state wide minor party ballot line and helping candidates for office aligned with our agenda. Notwithstanding a consuming effort, our approach failed to produce results we set out to achieve in the 2022 election cycle.

While I remain a large shareholder, retiring from the board of directors in May ended my tenure with roles at TriNet. At one level, it was hard to step away from being involved in the company Krista and I began 34 years ago. A journey rich with experience and relationships impacting my family and many others who’ve worked hard building a company to last. But the timing was right, and I have complete confidence in both management and our board to move on while achieving what should be every entrepreneur’s goal to work myself out of a job!

For 23 – Continue building, but with some new twists

Watching the sun rise on January 1 brought deep gratitude for the many lucky breaks I’ve been fortunate to receive, as well as optimism for what’s ahead in this new year.

Good health and a loving family are foundations I will never take for granted.

Teams growing around me are getting increasingly capable of driving progress across our social impact and community ventures. This helps transition me towards being more strategic and governance oriented while still having fun finding and engaging with new people who can help us.

With intentions to steer clear from any perceptions of partisanship, we decided that Unite NY will now drop all involvement in supporting candidates. We’re focused exclusively on building voter awareness and engagement to address systemic issues driving political dysfunction. In addition to independent polling, expanded media coverage and growing member development, we’ll be advancing our partnerships with state and national organizations similarly aimed at pragmatic solutions providing incentives for officials to put voters ahead of party interests.

Entrepreneurs Across Borders will be my primary focus in 2023. While our pilot in Jamaica was hampered by Covid restrictions since early 2020, we’re now progressing to show we can scale up connecting entrepreneurs in underdeveloped countries to resources within our network of in country and U.S. based seasoned entrepreneurs.  A week long visit in December opened up many new doors with high impact relationships enthused about joining the effort. My joining the Endeavor WNY board also jumpstarted insights on best practices to aspire to. Combined with an expanded team, EAB is now in go mode for ramping up.

So let me know if either reforming democracy or alleviating poverty by helping entrepreneurs in underdeveloped markets might be social impact areas of interest to you. Both movements are still in nascent stages but have some footing to show the potential for impacting many lives.

    Scoring Tech Talent – Upstate NY is Rising

    hand holding lightbulb

    Just finished my first scan of CBRE’s insightful report with a U.S. wide look at the talent trends inside the top tech markets.

    Several themes seem to track closely to what we found in our research for Chapters 1 and 2 of More Good Jobs. While CBRE researchers didn’t use MGJ measures of Retainment and Magnet Quotients, their methodology tracks to similar outcomes we targeted in our research for the book.

    Since my emerging tech community building efforts are furthest along across the Upstate NY region, I’ve listed below a few observations that caught my attention. To see the charts and tables for these citations, download the report so you can go directly to the listed page number.

    • p11 and Appendix pA48 Rochester Ranks Nationally – With a strong increase in the number of locally produced STEM degreed graduates, Rochester listed as #47 of top 50 Tech Talent markets in the U.S. Page 44 shows Rochester also doing well in the category of Underrepresented Race/Ethnic Groups in U.S. Tech Talent Workforce.
    • p58 Tech Quality vs. Cost Analysis: Rochester is on the edge of moving into the “High Quality” labor market segment for tech talent – while still maintaining the lowest cost structure of any of the top 50 tech talent metro markets in the U.S. This finding is not only a marketing opportunity for Rochester, but perhaps a metric we might focus on developing for comparison across all our region’s metro areas.
    • p68 North America’s Next 25: Here CBRE researchers ranked smaller labor markets with the most promising trends in growing both tech jobs and rising wages. Albany ranked #6 and Buffalo ranked #17.

    Taken as a whole, this research with a national comparison across markets shows three of Upstate New York’s metro areas recognized as trending in the right direction producing tech jobs with rising wages at a rate that is accelerating over peer communities with similar demographics.

    Results come from playing the long game to build connected communities

    When Nasir Ali and I launched non-profit Upstate Venture Connect in 2010, the Upstate NY emerging tech landscape was so much less developed than it is today.

    It’s been a long and committed effort to keep grinding with experiments for scaling solutions across the region to help connect founders to resources they need to start and grow innovation economy companies.

    Even as New York State struggles with a broken political system that further propels outmigration, I find this CBRE report to be a bit of validation from an independent source that helps bring visibility on the progress being made.

    While there’s much yet to be done, the news puts more fuel back in the tank to keep growing the movement our UVC community (now 15,000+ strong) has contributed to developing as a regional network over the last decade.

    The System Is Rigged…But It Doesn’t Have To Be

    I recently had the opportunity to join Keeler in the Morning for a lively discussion on the problems posed by party primaries in New York and the benefits to opening up the political process to allow unaffiliated voters to participate.  I advocated opening up the primary process, as is done in 41 other states, could help shift power away from party bosses and to the voters – particularly the 3.5 million New Yorkers not affiliated with a party.

    Bill and I disagreed on air about the likely impact of an open primary process, and he followed up with an online post summarizing his views. While I always enjoy my interactions with Bill, his piece made a few assertions with which I don’t agree, so will take this opportunity to provide some clarification.

    The reason for open primaries is a simple one – the state’s gerrymandered districts set up elections that will predictably be won by the party who holds the “safe seat.” This means that too often, the primary election is the de facto election.  Consider that less than 30 percent of general elections for state Legislature are competitive in New York state, meaning 7 out of every 10 representatives gets to office by being chosen by a party boss or simply winning a primary – elections that exclude those 3.5 million, and growing, independent New York voters.

    Who runs in primary elections? Candidates that are typically hand-picked by party bosses with the greatest likelihood of winning in a low turnout primary – which is increasingly tilted towards candidates representing extreme positions within the Democratic or Republican parties. What does this lead to? Elected representatives selected by an extremely small part of the actual electorate.

    I saw this myself when I ran for Congress as an independent candidate.  One of my learnings from that experience is that while the broken system needs fixing, the politics industry has no incentive to make the needed changes since the existing structure works to the benefit of those already in power- especially the two major parties.

    Despite what some have suggested, I will not be a candidate again as I’m better suited to bring about change through the more difficult route of helping catalyze a reform movement from the bottom up such as we are seeking to do with Unite NY.

    The Numbers Tell The Story

    Make no mistake about it, turnout in primary elections is abysmal. One recent example is in Albany – our State Capital with nearly 100,000 voters. The incumbent mayor won her primary election this year with fewer than 4,000 votes. Sadly, this is the rule, not the exception. The reason people have checked out is simple – voters are smart and they don’t want to participate in a rigged game.

    Contrary to what Bill had in his post, in New York the only parties still having statewide ballot access are Democrats, Republicans, Conservative and Working Families – a drop from nine parties recognized at the start of 2020.

    According to the National Council of State Legislatures, there are 41 other US states with some form of an open primary process. We at Unite NY are not advocating for opening the primary process up to allow people enrolled in one political party to participate in the opposing party’s primary. Rather, we want unaffiliated voters (not enrolled in a party/independent), to choose the primary in which they want to participate.

    The need to make this change is great, as there are currently more unaffiliated voters than there are people enrolled in the Republican, Conservative, and Working Families parties combined.

    And not only is the need great, but it is popular as well. A recent poll done by acclaimed independent pollster John Zogby found voters overwhelmingly support political reform, including open primaries, with two thirds of those responding saying open primaries will bring needed change to the state’s political system and three in four voters (76%) agreeing that “open primaries should allow independent voters to have a say in which candidates advance to the general election.”

    Closed Primaries Kill Moderate Candidates

    The week after announcing the poll results, John appeared on the Keeler Show sharing commentary on voter attitudes about electoral reform, including open primary. I’m quite glad Bill asked John to join him on the show to discuss something he doesn’t agree with – too few folks these days are interested in a discussion on a topic they don’t support.

    In the interview and blog post, Bill cites Ben Walsh winning the mayoralty in Syracuse as an independent and Byron Brown’s win in as Mayor of Buffalo as a write in candidate as reasons why we don’t need open primaries – but I’d draw a completely different conclusion from the same facts.

    Our Unite NY organization and its forerunner supported Walsh twice, and the effort it took for his team to win election and reelection were monumental. The hurdles he was forced to endure, whether it was the petitioning process to get on the ballot, or the challenges to coalesce support and build winning campaigns, were far greater than those with entrenched party support. But he ran as an independent because he knew a true moderate candidate had dismal prospects for success in surviving the low voter turnout in either of the two major party primaries.

    Likewise, Mayor Brown was forced to mount a write-in campaign after losing in a lightly attended primary because ballot access on an independent line is near impossible these days. Brown’s pragmatic positions resonated with the general electorate, but not the fringes who showed up in his party’s primary election.

    We need more Ben Walsh’s and Byron Brown’s because they represent the same interests as the majority of the electorate by placing People over Party – an identity general election voters resonate with but simply doesn’t line up to win in the hyper partisan closed primary process we have in NYS.

    Let’s open primaries and welcome people, not party bosses and political extremists, as the winning path to get the best candidates on the general election ballot.

    The Problem with Public Money Going to Private Companies

    The following is adapted from More Good Jobs.

    A long history exists of government funding that targets healthcare, environment, defense, or other societal needs. While it makes sense to allocate some public dollars toward research being conducted by colleges and companies, a grayer area creeps in when public funds go into commercializing a new technology or expanding production capacity, both of which become assets owned by a private company to grow their business. 

    The attractiveness from a political standpoint is clear: let the government write a check to a company as part of an economic development effort to create jobs. But who really wins with these initiatives?

    More often than not, the private company wins, the government comes out looking like they’ve made an effort, or nobody wins at all. But despite the public footing the bill, citizens like us almost never see real benefits. In fact, what is meant to be a major job-creating effort turns out to be a waste of money. 

    The Government Can’t Pick Winners

    The biggest problem with public money going to private companies is that it puts the government in the position of picking winners. 

    History has shown us the government’s track record for picking winners is horrible. A recent paper from Columbia Business School and Princeton claimed researchers found no evidence that tax incentives given to individual companies increased overall economic growth. Furthermore, the study found that almost a third of total state economic development incentive spending “went to .0072% of new firms and 1.41% of all jobs created by those firms.”

    Professional investors with their own money at stake have a hard enough time predicting which companies will grow. Even the best professional startup investors in the world pick more losers than winners. To expect a government bureaucrat to be able to outperform these investors is ridiculous. 

    Publicly Funded Publicity Stunts

    Putting politicians in charge of deciding which companies will be the beneficiaries of public support starts going down a slippery slope, with economic consequences that are rarely transparent. It opens the door for corruption, where instead of choosing the company best positioned to create jobs, politicians might give the benefits to a political donor or other special interest. 

    At best, the results are that these efforts underperform and fail to create the promised number of jobs. At worst, they’re little more than a publicity stunt for the politicians and companies involved. 

    When the government is in the position of choosing private beneficiaries without transparency, taxpayers aren’t shown the magnitude of tax dollars invested per job created or have awareness of any other alternatives that might grow more jobs. Instead, all attention is given to the ribbon cutting photo op with a collection of politicians vying for the opportunity to lay claim in saying, “Look at what I did for you.”

    Often, it doesn’t matter to the politicians whether or not their initiative was successful, only that it reflects well on them. Suffice it to say, in this scenario, the public loses. 

    Even Successful Companies Can Fail to Deliver Results

    You might think, politicians simply need to choose the right companies to support, but even successful corporations regularly fail to meet expectations. 

    For example, New York State under Governor Andrew Cuomo spent $750 million to build a solar panel factory to be used by Tesla, which had promised to create 5,000 high-paying, high-tech jobs upstate—3,000 of them in Buffalo. Yet the company has fallen short of its 2020 job creation goals. Worse, the state then lowered expectations from what was originally promised. 

    According to the Albany Business Review: “A Vanity Fair story in August found the state quietly changed the requirements Tesla must meet in exchange for its $1 lease on the Buffalo factory. The requirement for 1,460 “high-tech” jobs at the factory was watered down to jobs of any type. An agreement to hire 900 people at the factory within two years of construction ending in 2017 changed to 500. And the timing for creating additional jobs was extended to 10 years after the factory was completed.”

    This example shows that even when relatively successful companies are involved, government efforts often fail to create meaningful jobs in the numbers needed to help our communities thrive. 

    It’s Time to Ditch the Top-Down Model

    In the quest to create good jobs, public money going to private companies is not the answer. Tax incentives, government-built properties, and other benefits fail to produce results. These strategies have not proven their ability to create more good jobs at a cost that makes sense to taxpayers. 

    Instead, when we look at the places where true, organic creation of good jobs has happened, we see that it hasn’t been fueled by top-down policies or tax incentives. Good jobs come from the bottom-up, in which the best job generating communities embrace innovators and attract young, educated workers. Local entrepreneurs and community leaders in these talent magnet cities foster environments in which startups and innovative companies can thrive. 

    If more communities embrace a long term commitment to embrace these principles, we’ll have a chance to see tax dollars spent on more meaningful community investments – as opposed to the overhyped and underperforming ploy of putting our money into the coffers of private companies. 

    For more insights on how to transform local economies toward job growth in newer industries, you can find More Good Jobs on Amazon.

    Martin Babinec founded NYSE-listed TriNet, a Silicon Valley cloud-based HR service, where he served as CEO for the company’s first twenty years. Relocating to his hometown of Little Falls, New York, he founded nonprofit Upstate Venture Connect, StartFast Ventures, and UpVentures Capital, all of which help grow, support, and invest in transforming Upstate New York’s economy toward job growth in the newer industries. As an independent candidate for New York’s 22nd Congressional District in 2016, Babinec also founded the Upstate Jobs Party (UJP) to influence political discourse on better solutions to grow jobs and reverse regional population decline.

    Why Do Innovative Companies Consume So Much Startup Capital?

    The following is adapted from by book More Good Jobs

    Imagine walking into a startup meetup and asking the first founder you meet why private capital matters for startups. If they’re like most founders, they will look at you with a blank stare of silent confusion.

    Asking a founder why capital matters is like asking a fish why water matters — it’s such an ubiquitous part of their ecosystem that they can’t even imagine a world without it. Startups need capital to get off the ground, and generally, the more innovative the company, the more capital they require.

    It’s not hard to see that creating anything unproven in the market is more expensive than copying an existing business model, but what exactly makes startups so expensive?

    More than anything, the time, talent, and problem solving that startups require to create or overtake a market makes outside capital a necessary part of the entrepreneurial process.

    Problem Solving Costs Money

    When you’re solving a problem that no other company has tackled, you’re probably starting from scratch. That means laying the groundwork for your solution, making mistakes, and refining every step of the way — all of which consumes time and money.

    Whether the startup is creating a product, service, or technology, there is a lot of problem-solving and customer discovery required to iterate a solution that can scale up to large volume adoption beyond a local marketplace.

    Sometimes with a narrow, technology-based innovation that is timed to ride a host of marketplace drivers (e.g., WhatsApp, Instagram, etc.), it is possible for this growth to scale up incredibly quickly. But these are the exceptions, not the norm, as most businesses will go through a series of iterations to tune both the product or service and the path to growing new customers.

    Startups Must Educate Customers

    Not only do startups need to problem solve, but they also must educate their customers on their innovative solutions. The challenge of educating customers to become early adopters is a big hurdle when you are asking them to stop doing something they are already familiar with.

    People are naturally resistant to change, so there’s a burden of proof on the startup to show why the new solution is better in a way that the customer never heard of or thought about before.

    Startups also have to convince customers that the risk they’re taking by trying an innovative product won’t backfire. For example, if you opened a hotel, people would instantly understand what you do. But as Airbnb found, even with their Silicon Valley start and backing of legendary startup investor Paul Graham, it proved to be a lengthy process of discovering the right mix of education paths and risk-mitigation mechanisms to drive adoption for allowing strangers to sleep in one’s own home.

    For many innovative companies, earning their customers’ trust requires a significant investment of time and money.

    Innovation Requires Expensive Talent

    Lastly, startups in newer industries consume so much capital because they require expensive talent to solve their problems.

    People who already have plenty of other opportunities and sufficient demand for their specialized skills can’t be hired on the cheap, and startups don’t need only one of these workers — they need a whole team.

    It’s not realistic to assume that the innovation of a single founder will be enough to cover all the functions encompassed in building a true company that scales up to meaningful levels in headcount and revenue.

    This team alone requires a large amount of capital to cover salaries while the startup is gaining momentum and building its revenue stream.

    Capital Gives You a Competitive Advantage

    With these factors in mind — the problem solving, education, and talent required to succeed — you can imagine how easy it is for an innovative company to consume capital. Most startups simply won’t have sufficient revenue growth soon enough to power through the long product and customer development cycle, so they need significant external capital to get off the ground.

    The good news is that in today’s market, you can get a startup up and running faster than ever before. By taking advantage of cloud-based services such as Amazon Web Services or Microsoft Azure, plus prebuilt shopping carts and other online transaction tools, you can build a professional website and start selling your product or service in a single afternoon.

    The downside to this is that there’s also more competition than ever before. That’s why one truth about startups will likely never change: capital gives you a competitive advantage.

    More money means more talented people creating your solution, more marketing, and more customer education, all of which give your startup the best chance of success.

    For more insights on transforming local economies toward job growth in newer industries, you can find More Good Jobs on Amazon. Visit our More Good Jobs Community site to share knowledge and connect with builders and supporters of innovation economies everywhere.  

    Book Launch for More Good Jobs!

    2020 has been a year of surprises and adjustments for everyone on the planet.

    Since March, I’ve been blessed with staying healthy and surrounded by our entire family. But challenges across each of my company and non-profit organizations put me back into a more urgent work mode than I’ve been at any time since stepping down as TriNet’s CEO 12 years ago.

    While my recent posts targeted entrepreneurs and company leaders navigating Covid challenges using Wartime Leadership, I’ve been putting lots of energy towards finishing off More Good Jobs  – a project in the works for almost three years.

    People who know me through non-profit Upstate Venture Connect are familiar with the story. 

    What started in 2010 with a goal of helping nudge a new direction for the Upstate NY regional economy, has gradually (and sometimes painstakingly) evolved towards building and connecting local tribes to embrace cultural elements more commonly found powering metro areas with an abundance of emerging tech company startups.

    More Good Jobs is both the story behind that journey and a playbook I hope will help leaders look to for a menu of options to consider if they are ready to join or jumpstart change in their own community.

    With the book launching October 20th, much of my writing for the rest of the year will be devoted to themes coming out of More Good Jobs. I’ve set up MoreGoodJobs.org to house dedicated content and also build a MGJ Community for people wanting to engage with others interested in developing entrepreneurial ecosystem.

    What follows is an excerpt from my introduction in the book. That introduction continues on the MoreGoodJobs.org site – so if the story is of interest, I’ll hope you click on over there to check it out and perhaps request a free chapter as well as add any comments and share with your friends.

     * * * * * * * * * * * * * * * * * * * * * * *

    Introduction 

    I am the product of two valleys.

    I was born and raised in Upstate New York’s Mohawk Valley. As many in my area do, after college I left to pursue my dreams elsewhere. Unlike many others, I ended up boomeranging back home twenty-five years later.

    The Mohawk Valley is placed within a larger region that is an undisputed talent factory, attracting students globally to attend our world-renowned colleges and universities. The Commission of Independent Colleges and Universities reports that New York has more students traveling in from other areas to attend college than any other state.  As a whole, the one-hundred-plus Upstate NY colleges enroll almost a half-million students, including tens of thousands of STEM students, making it one of the largest STEM cohorts of any geographic region in the country.

    There’s a flip side: we wave goodbye to far too many of our next generation leaving Upstate New York after graduating college as they search for better opportunities elsewhere.

    Silicon Valley is my other world, the place where I landed in the late 1980s due to my job transfer. I arrived with no advance plan or relationships, and after two years of a frustrating search for a new job, I decided to leave my setting of secure employment to start what I hoped would become a successful small business in the then-unheard-of category of human resource outsourcing.

    What followed was a roller-coaster story of Silicon Valley challenge and opportunity. A ride that I am still on today as a board member of my company, TriNet, a New York Stock Exchange–traded company with annual revenues of about $4 billion.

    In the twenty years I served as TriNet’s founding CEO, our principal target market was emerging technology companies and supporting ecosystem players who invested in or served these high-growth organizations. Since TriNet provides the full range of human capital management to help these firms grow, I had an insider’s view into how innovation economy companies get started and grow, initially in Silicon Valley and, over time, in all the major tech innovation hubs in the United States.

    I first began to pay attention to the contrast between my two valleys as my wife and I traveled back home with our children to visit our extended families. Over a decade of these trips, our priorities evolved around the setting we felt would be best for raising our three children. It was during the summer of 1999—while TriNet was on the cusp of seeking an initial public offering (IPO) at the very height of the dot-com boom—that we made the life-altering decision to relocate back to my hometown of Little Falls, New York.

    The plan was for me to cross-country commute for eighteen to twenty-four months before passing the CEO baton to another person. But the dot-com collapse thwarted that scenario. TriNet’s planned IPO was aborted post roadshow on pricing day, in October 2000, and my commute ground on for a full ten years as we rebuilt the company following a painful series of layoffs.

    Living a bicoastal existence with long commute times (and no direct flights from Upstate to the West Coast!) spurred lots of reflection on the contrasts between my two valleys. It was over this decade, commuting between these two worlds, that I observed the stark reality of the similarities and differences between them.

    Both regions produced incredible numbers of talented young people. And yet Silicon Valley was thriving with a magnetic pull for retaining and attracting these young people from elsewhere, while my Mohawk Valley seemed to be moving backward by exporting them.

    Logging more than a million miles in cross-country flights during this period prompted lots of reflection on why this gap was so vast, even when discounted for obvious differences of population density and current industry clusters. The business community across Upstate New York seemed to be rallying against the high taxes and unfriendly business regulations, claiming that smaller government would fix our problems. But as I looked around the country, this didn’t feel right. California certainly wasn’t known for its business-friendly regulation or low taxes. Neither was Boston or New York City. It seemed there needed to be a better reason for this divide I was experiencing.

    I thought back to my own experience. What if I had decided to start TriNet while living someplace other than the San Francisco Bay Area? How would it have turned out? Did we owe some portion of our company’s success to the unique environment that Silicon Valley had to offer.

     Click Here to continue the Introduction story on MoreGoodJobs.org

    Wartime Leadership: Survival Assumptions

    How do we navigate through a period where we know our revenues are going down, but we don’t know yet by how much, or for how long? No one can predict when business will return to the pre-pandemic state. We know we have to cut expenses, but what’s the right reduction target to be aiming for?

    As discussed in our Wartime Leadership series opener, we all lack clarity for answering these big questions. This uncertainty in turn drives hard decisions around how deep to take cost reductions – especially when it comes to laying off team members. 

    By now, many companies have already taken their first round of cost cutting yet remain more than a little uncertain if they’ve gone deep enough.

    This post offers a methodical approach to defining a basis for forecasting the 2 most critical items on a CEO’s list: revenue and cash. The basis behind what gives visibility to revenue and cash drives how deep our cost cutting measures have to be to stay alive – or put another way, our survival assumptions. 

    We’ll start with the revenue forecast since that factors into cash flow planning and is also the harder to define through this fog of war. We’ll also presume you’re a B2B company not expecting a quick rebound once stay at home orders are lifted since the pace of restoring revenue depends on a combination of factors you have little control over. 

    With so much diversity across industries, business models, company profile etc., it’s not feasible to suggest a universal model that works for everyone. I’ll instead highlight a few process steps that may help steer your forecast towards being realistic and sufficiently fluid so you can guide decisions as circumstances change.

    Throw out the peacetime budgeting process 

    If you’re running an established business with a history of operating and sales team metrics, you’ve already got a defined process to approach budgeting. In peacetime, this is typically a CFO led exercise beginning with past baseline and trends passed to each operating exec. Execs and their departments add updates without necessarily having company wide guidance on macro trends or big picture external forces to consider.

    Since how and when businesses recover from the pandemic will be all over the map (including impact on your customers reeling from pandemic losses themselves), the wartime approach has to take in a lot of non traditional input, gathered in a consistent manner so the findings can be rolled up and examined holistically, as opposed to each department viewed within its own silo. 

    Get outside the building to gather new data

    Gauging the extent of unknown external forces is what makes for the wartime exercise here. Relying only on what you know from inside the company would be like guessing how many troops you’re dispatching to battle before assessing the size and positioning of your enemy. 

    Wartime CEO and serial entrepreneur extraordinaire Steve Blank says “There are no facts inside the building so get the heck outside.” This means dividing the team up with specific missions to go out and grab external findings from customers and prospects. When synthesized, these findings paint a more complete picture of the forces shaping the uncertain world your company is interacting with. 

    Sample discussion points might include: 

    • How are different customers and prospects affected by Covid-19? 
    • Which geographies and/or industry segments are they most worried about?  
    • Are they reducing staff? 
    • Do they need to modify their buying plans with you now? 
    • What changes can you make to help them? 
    • Which trigger points or trends is the customer watching as leading indicators for where their revenue is headed? 

    With pandemic restrictions precluding in person visits, you won’t get a grasp of what’s happening with your customers by sending out email surveys or expecting them to give you online feedback. In wartime it’s the human contact that matters, now more than ever. Not only to get a response, but also to coax a bit more information out than they would not likely provide other than through one on one real time contact. If they don’t answer your calls and personal outreach, then that itself is a signal worth tracking. 

    Orchestrating a tight script with relevant questions is a large, manual task involving a broader portion of your team. A good script that you can deliver increases the number of data points and gives you a better handle on trends and findings.

    Making sure everyone gathers input off a similar script increases value. This includes front line account managers, sales team members, and other managers and executives working in a coordinated fashion. Consistency of information capture is also important. This could be a scoring system in which account revenue projections are qualified with relevant comments (+ and -) that are also shared in a group exec team discussion as part of the roll up process leading to a consolidated forecast decided by the CEO and CFO. 

    Throughout the customer outreach at all levels, keep pressing for ideas that point to key leading indicators signaling strength of the account’s expected revenue. If you’re able to spot assumptions behind individual account forecasts, a pattern may emerge that can be distilled to a few core measurements for your revised overall company revenue forecast. These measurements will help in articulating the company plan to your board or possibly alternative financing sources. And they will now be supported with quantified assumptions which can be tracked over the coming months so you can update the forecast as the recovery unfolds.

    Let the cash forecast drive cost reduction planning

    At the same time you and outward facing team members are speaking with customers and prospects, the finance team can be pedaling hard on collecting payments already due, tightening up credit policies that might lead to reducing or eliminate credit, building cash reserves by drawing on available lines of credit and mapping out other debt options in addition to grinding through the process to file for the government sponsored Paycheck Protection Program and Disaster Recovery Loans you might qualify for.

    Focused discussions should also be underway to identify an expanded range of cost cutting options. Following the kick off exec team session to generate an initial list of options, individual execs meet for a detailed drill down with the CEO and CFO. These interactions are less about making decisions on the spot as it is to spark and nurture ideas, and also note who is contributing in ways that look beyond protecting their own turf in suggesting creative options that make sense for the entire company. 

    While some of the obvious cost cutting might be implemented immediately, finalizing layoffs are best deferred till after you’ve got all the information put together from the updated revenue and cash flow forecasts. It’s only then that you arrive at the stage of showing the projected cash burn compared to your previous budget so you can then hone in on the amount of cost reductions needed.

    Layoffs are the most drastic measures and should be undertaken after a great deal of thought. That being said, once the decision is made, it is best to act quickly and do in one single shot rather than creating waves of layoffs. Dribbling out layoffs over time is a sure fire way to damage your leadership credibility, destroy morale/impede productivity and increase the outflow of the very people you want to retain. 

    Active leadership matters

    Wartime leaders are visible and hands on throughout all these steps.  Everyone in the company is looking upwards to see how involved the CEO is. This is not a time to isolate and speak only with investors and executives. Team members are already aware the virus has severely disrupted the business, so there is a heightened sensitivity about whether their own job is in jeopardy. This is the time to step up interactions at all levels by taking part in team meetings and selectively engaging in 1:1 follow up discussions after the group meetings. 

    Asking questions and getting input from the front line team demonstrates through your actions that both assessment and decisions are being approached methodically. Your personal interactions will also prompt chatter through the ranks – which in turn spurs greater cooperation in driving the information flow upward so you can build the right set of survival assumptions that become your instruments for guiding key decisions through the uncertain times ahead. 

    Next post in this series goes into the hard decisions around positions, people and process for affecting a layoff. 

    Wartime Leadership

     This past week I reconnected with CEOs in our UpVentures portfolio and others running companies that I have close relationships with. Synthesizing those conversations with other signals I’m getting about the economic impact of an extended shutdown, this post will advocate throwing out elements from leadership approaches companies were following just a couple months ago and rapidly shift to a wartime footing.

     Let’s start with some necessary context before advancing to leadership approaches for these unprecedented times.

    We lack clarity on timing of downturn and recovery

    We know the scope of Covid-19 shutdown is like no other business challenge any of us have faced before. Post 9/11 had some parallels, particularly for companies in NY metro – but did not lock down entire industries and consumers for an extended period as is happening right now.

     My own context coming closest was managing through the 2000-2002 dot bomb era – best appreciated by those who were in leadership roles in Silicon Valley over 1997-2000.  Back then, we rode the dot com wave to frothy excess, only to see it all blow up in a nuclear winter that followed starting mid year 2000.

     About 98% of TriNet’s revenue was coming from dot com customers – a great story when we sought to go public with our first filing on March 2, 2000. As mentioned in my 2014 Pre-IPO Anxiety post, things didn’t work out then as planned and I had to dig into wartime leadership mode for the next two years.

     Like now, we started the dot bomb era thinking it was a temporary aberration. Up to that point, dot com fueled an unprecedented wave of success and it’s natural to have confidence the past will soon return so could get back on track. With TriNet’s revenue model based on the volume of employees we serviced at other companies, customers closing shop or laying off people due to losing their own funding were immediate hits to our revenue. In a wartime environment, no one wanted to talk to us about buying our services – who had the time? We knew it would turn around at some point, but when would customers stop laying off and when would others be ready to start buying again? No one was predicting it would take the better part of 2 years to recover from that nuclear blast.

     Like now, leaders were understandably concerned about trying to retain their talent and think that by showing optimism with the “we’ll get through this” outlook we can keep everyone working hard, and in sync, just like before.   Albeit now we have the additional complication of not being able to call people together to meet in person.

     Like now, since we weren’t clear on the duration of the downturn, we felt the urge to provide assurances to our team by making promises we weren’t sure we could deliver on.

    And probably most importantly, like now, we as leaders were trying to avoid making the hardest decision of all – laying off team members to rightsize the business so that we could ride out what we knew would be harder times ahead than many of our team understood or were anticipating. Not just employees who were marginal performers, but cutting right to the bone by laying off talented people who had worked their butts off and done everything and more than we asked them to do.

     In short, whether your business is fortunate enough to be in the category of being fueled by the pandemic, or the more likely scenario of being savaged by it, our entire mentality of leadership has to change from peacetime to wartime.

    Peacetime priorities no longer matter 

    In peacetime we tend to put culture first, building the strongest consensus possible to get buy-in on decisions and are also deliberate in pointing resources and projects that support our medium to long range strategy. Most of that becomes irrelevant in wartime.

    It’s no accident our military operates on a strict command and control model. Survival is the lens by which all decisions are examined through. Leaders micromanage the critical things that matter – for companies that begins with cash and collections since that’s the oxygen that keeps the company alive. 

    Start the process now with heightened focus on cash management with ultra conservative assumptions for a longer period than just a few months. Getting in line for the government’s PPP and disaster recovery loans will be short term band-aids, but necessary steps to invest management time in today since we know there will be a lag time to get that relief. 

    All bets are off if we thought another round of funding was on the horizon from equity investors. Living on our own cash with whatever debt sources we can raise is the new imperative.

    We’ll also re-examine our assumptions about what we need on a wartime team. Not just our direct reports, but at all levels of the company. Can we combine some roles with one person now wearing 2 or 3 hats instead of the peacetime practice of separate departments? 

    Since we have to move fast, we know we’re going to have to make some decisions with imperfect information that do have some risks in the outcome. Sometimes that means we’ll break glass and ask for forgiveness later.

    There’s only one goal in wartime

    I’ll close with a couple quotes from Brad Feld’s excellent post Wartime CEO:

    Peacetime CEO sets big, hairy audacious goals. Wartime CEO is too busy fighting the enemy to read management books written by consultants who have never managed a fruit stand. – Ben Horowitz

    Your big hairy audacious goal in wartime is not to die – Brad Feld

    The next post in this series will touch on the hardest of hard things – approaches to laying off team members.

    Build to last requires partnering with the right investor

    Overcome Investor Bias | Learn from TriNet Founder Martin Babinec

    Someone just forwarded me Fred Destin’s excellent post “What founders really want from VC’s.”

    Fred’s insights are absolutely on point, and reading them prompted me to dig up an unfinished post of my own on this topic – one that I began writing earlier this year following the exit of TriNet’s long time controlling shareholder, General Atlantic.

    For context, consider that TriNet’s annual revenue was about $50 million at the time of GA’s 2005 initial investment and have now grown to more than $2 billion.

    More important than the growth capital GA invested, was the expertise and support they provided through our doing 10 acquisitions and transactions, including complex ones like our pre-IPO purchase of a much larger public company which we then took private, large debt financings that benefitted all shareholders, our successful March 2014 IPO and the smooth transition of their shares to Atairos, another large institutional holder so there was no disruption of our share price in the public market.

    GA support also was instrumental helping us recruit my successor CEO Burton Goldfield, top quality board members and key executives, all while helping us with a savvy investor’s outside in looking view on important board level strategic and governance issues as we navigated through challenges at each stage of the company’s growth in that 11 year span.

    It is hard for me to imagine how TriNet would have evolved to both our current marketplace position and promising path to remain an enduring company of the future had we not had the richness of GA’s contribution led by Managing Director Dave Hodgson.

    So it is with some reflection now that I share a few principles on investor attributes I bring up when mentoring entrepreneurs who are in earlier stages in the journey of finding and working with institutional investors.

    Companies don’t invest, people do

    Institutional investors are duty bound to stay within the expectations set for the limited partners who are the source the fund’s capital. While this baseline can never be overlooked, the partnership responsible for running the fund still has latitude within the fund charter to make the key decisions leading up to when and how the fund ultimately exits the investment.

    How that latitude gets exercised has a lot to do with the quality of relationship and trust between the company CEO (and board), with the key sponsor inside the fund – typically the company board member who is at managing director/general partner level in the fund.

    The person who is your financial sponsor will end up being the company’s advocate inside the venture fund’s partner meetings where tough decisions are hashed out on things like:

    – how the fund’s holding in your company is valued
    – whether to increase the fund stake with a new round
    – should the sponsor orchestrate a change in company leadership
    – how would the fund’s non capital resources be deployed in supporting a company transaction or initiative
    – when and how the fund’s stake in the company will be sold

    As the CEO, you won’t have insight to the dynamics of those internal fund discussions, but you’ll certainly be dealing with the aftermath once the decisions are made.

    So WHO the person is that you are relying on to be your advocate has everything to do with the personal qualities of your sponsor and how well aligned he or she is with the company’s view of playing for long term success vs. building to flip for near term gain when the inevitable unanticipated speed bump occurs in stalled company revenue growth.

    Relationships are tested when times are tough

    It’s hard to gauge the quality and strength of any relationship when things are going well. But if you’re truly scaling up a company, the truism is that is that even with the boost that might come with a big slug of new equity capital, it is never a straight line to uninterrupted periods of steady growth.

    Whether due to bad planning, execution failures or external factors outside the company’s control, the time will certainly arrive when the company misses hitting critical budget goals expected to show progress in the investment.

    When things go awry, whoever your financial sponsor is now has the added burden of convincing his/her partners of the fund on whether the setback is navigable or requires an investor driven change (e.g. like firing the entrepreneur CEO).

    This requires the partner to have a deep enough understanding of the business and capabilities of the CEO and team, as well as the credibility and persuasiveness to advocate a difficult position that might run counter to conventional wisdom or prior experiences inside the private equity firm.

    Don’t shortcut the investor diligence

    The best sources to diligence someone who is a candidate to be your financial sponsor inside a fund would be founder/CEOs that sponsor has worked with in prior investments.

    Here are a few areas that could be worth exploring to diligence someone lining up to be your financial sponsor:

    – How well did the sponsor set expectations and deliver on them? When did he or she have to walk back expectations they previously set?

    – Describe examples of where the sponsor dug into the details of the company’s business and applied that knowledge in a way that surpassed contributions of other board members?

    – How persuasive was the sponsor at influencing the view of other directors on the board to get to the right outcome?

    – How did the sponsor help when company results fell below budget?

    – How did the sponsor affect a company outcome that might have involved responding to a company crisis or pursuing a major opportunity in a compressed time frame?

    Don’t stop at just one diligence call. Speaking with CEOs from at least 3 former portfolio investments will provide a richer picture than any single source.

    Viewing company success as personal success

    Like most entrepreneurs who’ve been on a company journey a decade or longer, my ambition has always been about building a company to last – knowing that if the company is able to grow profitably over a sustained period of time it would be achieving what I set out to do in filling a market need and growing a team responsive enough to adapt to ever changing conditions that challenge others in the same industry.

    If I was able to lay the foundation for building a company to last, I wouldn’t have to fret about where I would end up financially since the pace of growing the company’s value would far exceed dilution of my percentage ownership stake.

    While it’s a straightforward financial proposition to see it’s better to own a minority slice of a huge pie than be controlling shareholder in a small company, the bigger issue many founders wrestle with is whether they can separate themselves from company leadership if that is in the company’s best interest.

    Whether the founder opts to exit the leadership team or is nudged by the controlling shareholder(s), either case involves a high stakes transition where the financial sponsor is in a position to influence the outcome in a manner that all involved emerge as winners.


    The long game begins with shared vision and trust

    Some entrepreneurs, and investors drive towards generating a decent return over the near term by building a company likely to be sold for a profit at the earliest possible time.

    If you’re in the other camp of wanting to build a company to last, continuous company growth will still provide meaningful exit opportunities where you could be in the envious position of passing today’s sale to stick with the vision of building a larger and enduring company.

    That can end up with a more financially rewarding and satisfying journey, but likely to be achieved only when there is alignment with that shared vision and trust between the financial sponsor and CEO. Figuring that out before the investment is made is the first step towards what can become a long and mutually beneficial relationship.

    [Related post: Embracing Public Company Readiness in Scaling a Private Company]