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. 

Perils of a Rich Valuation

The entrepreneur gushed “We just closed a $2.5 million Series A on an $8 million pre-money valuation.”

My response: “Great news – now that you’re a couple months past close, what’s the probability estimate of hitting the 1st year revenue target you set for the VC’s?”

The smile quickly vanished as the entrepreneur acknowledged it was far from being a lock to hit the target. Both the risks and attendant pressures were already starting to hit home.

Valuation optimism can be masked with insufficient data

Unfortunately, this is a much too common scenario as founder drive to minimize personal equity dilution by grabbing the fattest valuation possible seems to override their judgment on what happens post deal.

Typically the culprit is too little thought given to the underlying assumptions behind a detailed bottoms up financial model. Proper models take into account factors like average deal size, sales process steps and time to close, productive lead sources beyond executive team personal relationships and diminished close rates of non founder sales reps. [See my post: Leading Sales as a Startup CEO].

The worst offenders set their valuation target first and then back into a set of projections that align revenues with the valuation goal as they scurry about for data points supporting their wished for revenue trajectory.

While VC’s will certainly review assumptions behind revenue as part of their due diligence, entrepreneurs will get some leeway if the product offering is distinctly different with what’s already in the marketplace (thereby lacking trend comparison with similarly situated companies) and you’ve already racked up a few sales to your credit.

Overly optimistic projections come with consequences

The path to judgment day starts with board meetings in which the new institutional investor board members are now brought up to speed with the insider’s view of your progress against the expected revenue targets that were in the deal.

If you’re absolutely confident you’re right on path to meet or exceed the targets then you’re golden.

But if you’re starting to break out in a cold sweat soon after the deal closes, then you’ve got the hard choice of perpetuating expectations you may not have confidence in or going about the delicate process of resetting expectations.

Perpetuating the improbable is a gamble that ever optimistic entrepreneurs take, believing somehow, someway they will find a solution over time.

However, as projections don’t get fulfilled, that factor alone becomes the biggest reason entrepreneurs get pushed out of the CEO role in favor of someone who has a proven track record of “meeting the numbers.”

And that equity stake the founder was concerned about? When projections get missed and Series A funding dries up while there is still a substantial burn rate – you then have the classic down round scenario where in order to keep the company alive with a new financing, founder shares can get crammed down to a pitiful percentage of ownership compared to their post series A stake.

De-risk with detailed assumptions behind revenue components

You can mitigate risk by building a detailed model for how revenue projections are derived.

List assumptions behind each component of a revenue formula so there is complete transparency and no “black box” – even tilting assumptions towards most realistic, if not outright conservative achievement at critical components of the revenue formula.

The best entrepreneurs don’t settle on just a high level view of 2-3 revenue component steps to come up with a formula. Instead they tear apart every step in the customer acquisition process to find patterns which can be reasonably tracked (with a minimum of admin burden) that help point to predicting success at that particular step in the sales process, and in the aggregate – timing of future revenue flows.

Since early stage companies typically won’t have a large enough team for a professional CFO on staff to build such a model, they can fill the expertise gap with an “Interim CFO” who has the background and strategic perspective to dive in and gather input from multiple team members to guide a true bottoms up model with detailed, defined assumptions.

The best interim CFOs divide their time among a cadre of early stage companies and often have the pattern recognition of having been through this exercise across many similarly situated companies. This helps not just in developing the model but with an ongoing retainer relationship will help their client tweak the model as more data comes in and analytics for management and board are refined.

While it’s best to avoid optimistic projections pre-deal, the earlier that investor expectations get reset to the proper level the more likely you are to retain your credibility as a leader.

So don’t wait for your next round to beef up the visibility and accuracy of your forecast. When you’re depending on other people’s money – than your success, and that of your company, may end up riding on how well you can predict the future with a financial model that you actually deliver on.

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

Overcome Seed Investor Bias

Overcome seed investor exit bias with vision and passion

As an active seed investor with my UpVentures, it’s not unusual for me to be weighing odds of investing in one company with some plausible acquirer targets on the horizon, versus another startup with a more speculative moon shot based on a large, but totally unproven, market opportunity.

This dynamic plays to entrepreneurs too. Wouldn’t a more likely pay day come in a space where others have shown some traction, ahead of being out there on the “bleeding” edge because you’re pioneering something that almost no one else sees yet?

There is no absolute here. Though as a seed stage investor, it is probably a good idea to have a portfolio with a mix of these two opportunity paths.

Investors can under appreciate market timing

Being ahead of the curve in a new and unfamiliar industry raises seed investor uncertainty about where the exit paths will be. This prompts a subtle bias for us to instead focus attention on opportunities that seem to have nearer term possibilities for liquidity.

But as IdeaLab founder Bill Gross recaps in this video reviewing data from 110+ companies he had a hand in, his search for causality in the factors of idea, team, business model, funding and timing (five classic early stage investor criteria) shows evidence that market timing had more to do with startup success than any of the other key criteria we seed investors rely upon.

Even one better is the wisdom of Paul Graham and his insights that come from decades of seed stage investing and running Y Combinator.

Overcome Seed Investor Bias

While multiple Paul Graham essays touch on this theme of market timing, one of my favorites is Black Swan Farming – he nails this seed investor bias against new models and markets by sharing logic behind his thinking why he felt Facebook was a lame seed investment opportunity when he first heard of it.

Biggest opportunities powered by multiple macro forces

While startups generally have some kind of societal, market or technological trend underlying their plausibility for being an investable growth business, if you parse through any list of $1B+ exits, you’ll see the big winners enjoyed a confluence of multiple macro trends that drove growth for an extended period.

Overcome Investor Bias | Learn from TriNet Founder Martin BabinecMy appreciation for this factor of multiple trend convergence began as it was probably the biggest reason prompting launch of my own startup journey in founding TriNet in 1988.

While very much a rookie entrepreneur then, I was more than a little passionate about how certain trends were both irreversible and directly related to powering our business model behind outsourced HR services including:

  • Increasing government regulations burdening employers
  • Shift in employment landscape from large companies to small
  • Smaller companies needing benefits to compete for talent (previously the domain only of big companies)
  • Technology adoption driving both speed of business (narrowing core competency that would in turn drive outsourcing) plus add new capabilities to enable efficiency in service delivery across a large number of smaller company customers.

As obvious as these trends might seem today, the late 1980’s was a different world and even venture investors couldn’t warm up to our opportunity since they didn’t then appreciate how our perceived pure service business could be sufficiently technology enabled to scale and leverage these converging trends as fully as TriNet proved to do.

Winning entrepreneurs articulate vision with passion

Vision and passion are important for any startup CEO. But if you’re forging new paths in unchartered models, you’ll be hard pressed to raise seed funding without a founder CEO getting across both these qualities.

Take the time to unpack specifics behind your supporting macro trends. Cite independent sources with data that supports your thesis. Tying multiple trends to defined elements of your business model and execution strategy boosts credibility in your vision.

But even those actions are not enough to sway seed investor interest if there isn’t a clear sense of deep personal passion on why this means so much to you.

Passion comes through when investors become convinced about the entrepreneur’s emotional commitment to the “why me” behind the problem the venture is solving. Our senses pick up the cues for this emotional commitment probably more so by how you articulate, than the logic supporting your argument.

A deep, passionate commitment is essential to overcoming the many obstacles ahead, including attracting the right team members who you’ll be asking to take their own risks in joining a team with an unproven model and/or industry.

Entrepreneurs who get seed investor attention are the ones whose vision and passion are so ingrained in their persona that they clearly differentiate from the crowd of their startup peers.

So don’t fear being “over the top” in getting across your passion and commitment. How you message that emotional commitment, coupled with a clear vision that ties specific trends to your model is what we’re looking for.

Winning investor hearts, along with our minds, is the combination that unlocks wallets to speculate with even greater risk than the semi plausible exit strategy we’re weighing you against as our investment alternative.

Ecosystem investment helps propel new startup creation

Yesterday morning I had several unsolicited requests for funding from Mohawk Valley entrepreneurs. It seemed odd, since a bunch came in at the same time from the local area.

Then someone pointed out an article in the Utica OD profiling my donor advisory fund at the Herkimer and Oneida County Community Foundation.

While the article wasn’t inaccurate, I can see now that when people think of entrepreneurs helping startups and the word funding is included, than conclusions gravitate towards this being about investment dollars going directly into startups.

It’s true that I’m one of Upstate’s most active startup investors. I’ve touched more than 70 companies through both direct investments and LP relationships in seed and private equity funds. My portfolio and investing interests are profiled on my UpVentures.com site.

But the High Growth Entrepreneur fund at HOC Community Foundation is different. That fund is not about my investing directly in companies, but instead towards supporting infrastructure that helps build our local and regional startup ecosystem.

Startup Ecosystem Infrastructure

For me, startup ecosystem infrastructure includes things like programs, activities, events, online assets and other resources that help bring the right parties together.

Building such infrastructure is my full time volunteer role as I created and help run Upstate Venture Connect, a 501c3 non profit now in our fifth year of operations. (Visit UVC.org to see some of our program initiatives and resources that bring entrepreneurs into contact with others who can help.)

Among the initiatives brewing locally is the thINCubator – a college student startup accelerator program housed at Baggs Square, the Commercialization Academy at AFRL’s Rome Labs and accelerated curation of a startup ecosystem map and events calendar that will bring more visibility to our local startup resources and activities.

Also being worked on is launch of a Mohawk Valley seed capital fund comprised of high net worth individuals qualifying as accredited investors who work together to invest as a group, as well as help mentor and support the startups they come into contact with.

With the Community Foundation donor advisory fund I’m interested in supporting leaders with similar ecosystem building aims – likely to include some new ideas on what could bring the right people together such as experienced entrepreneurs, technical talent, investors, service providers even academics and community leaders. The common denominator is a personal passion for being committed to help startups.

Who knows? Maybe a Startup Weekend, Tech Meetup group, Hackathon, 1 Million Cups chapter or something else not even on our current menu will percolate up.

I’m looking forward to seeing proposals and helping support leaders who are ready to put themselves out there to get something going that helps entrepreneurs and startups.

Whether you’re a startup seeking investment or you see an opportunity to help contribute to building the ecosystem, you can message me through the Babinec.com web site. And consider commenting right on this post below and/or sharing the link with others you know who might have interest.

This is a fun journey with big time impact in helping our best and brightest talent – join us!

Numbers not the only measure of entrepreneurial success

While most of my inbound startup inquiries come from first time entrepreneurs, this one was different. Even though he was still pre-launch, the aspiring entrepreneur is on the founding executive team of a company that went from startup to a successful IPO in six years.

Now with a year of public company executive team experience on top of managing through multi-year hyper growth, his view of the challenges and decision making to build a true enterprise were things I could relate to right away.

He was getting ready to leave the public company and venture off to start a venture where he would be a first time CEO. Plus he was in the enviable position of choosing to self fund or take his pick of investors at the door with Series A checks in hand before he even showed a pitch deck much less form a company.

What was surprisingly refreshing in our conversation were the entrepreneur’s thoughtful questions, and even a degree of humility that I almost never see from someone with that success pedigree.

After discussing the topic that prompted his call, he shifted into asking me about insights I might offer for the chapter 2 journey he was about to embark on. This was kind of fun for me, since sharing with someone who had been through what he had could be done with a lot of shared context so we breezed through some heavy topics quickly.

Imagining if I were in his shoes, three quick highlights came to mind:

1. Take some time off between gigs. Even though his vision for the new startup was a burning ambition, he is coming off six years of continuously running full tilt. Taking the helm to build a startup from scratch is an all consuming endeavor. The opportunity to recharge now, especially with family, might not be coming again for potentially several years or longer. No matter how quick the market might seem to be moving, there is no doubt that opportunity would still be there for him even if he took 6-12 months off now – time that could never be recaptured again.

2. Finish Big means a lot more than liquidity. When you’re in the trenches going through all that’s involved in building a high growth company, it is way too easy to fall into the trap of thinking how great life will be if you exit someday with a big payoff. However, in my own experience of speaking with quite a few other exited entrepreneurs, I’ve found many more of them unsettled with their lot than those who were leading fulfilling lives. Bo Burlingham’s recently published Finish Big – How great entrepreneurs exit their companies on top, covers this phenomenon with such great insight that I am now giving it to every startup I work with as they approach Series A financing. That’s right, putting the lens on what makes a successful exit (beyond financial measures) can guide decision making on influencing the kind of company culture to build and how to set expectations with those around you that you will want to deliver on.

3. The reward is the journey. In the 20 years of my serving as TriNet’s CEO, this became a mantra incorporated into my closing remarks at our quarterly all hands meetings. The thought is often attributed to Steve Jobs and to me embodies belief that reward isn’t measured so much by the imagined big exit, but instead by the little successes experienced by team members at every step we took along the way. No matter how hard we worked in constantly adapting to change, we sought out ways to reap reward from things like crazy ways to make meetings fun, hiring people we enjoyed spending our time with and friendly competitions to do things we could see made a difference for our customers and their employees. Memories of those shared interactions and successes will last a lifetime for me and many others who found intrinsic reward from being part the TriNet journey.

I’ll be watching with interest on how this new startup entrepreneur’s journey unfolds from here. He has the maturity that points to the right stuff. Those getting on his team are likely to benefit in ways they’ve not yet imagined.

Prior post with related themes – Startup to IPO: An Entrepreneur’s Reflections