Reassess Reality (Leading your Startup through CRISIS Step #2)
Reassess your reality. What are the truths you have to give up on to lead your startup through the crisis
It’s all about reassessing your reality, finding the truth that you have to give up on, and some new truths that you may have to accept as driving your business now. We divide it up in a few steps.
The first step is to take a cold, hard look at your customer value. You can no longer assume that the customer value you’ve been providing is the same customer value, you’ll keep providing.
Are your Customers Still Around?
First of all, is your customer still around? Or has that customer maybe disappeared in the crisis, or are they under severe strain so that they might disappear soon? This is a very important fundamental question to ask. For example, If you’re serving the travel industry, you will find it very hard to still have a business going for awhile.
Second, if that customer is still around, then what is their “job to be done?” A classic example: many companies, before the crisis hit, were looking at how to manage more growth, how to get more growth, and now suddenly they’re all straining to reduce costs as fast as possible. The openness of senior management for certain solutions that help drive growth is going to be a lot lower than for solutions that help to reduce costs.
Is your Product Composition still optimal?
This then drives a new product composition. So we recommend that people really do a customer empathy map. Thinking again through “what is the customer today thinking, what are they feeling? And also, what is their “job to be done”? So that we can potentially, on our side, come up with a new positioning of our product or maybe even highlight new features of our product.
Classic example: a consulting company that would have helped with managing growth or with building new distribution channels or developing new products. They would now look at “can we get some of the non-performing distribution channels out?”, or “can we take fewer products onto the market so that we can be more efficient?”
Ability to pay?
And finally, for that new product you are imagining, will there be enough willingness to pay? Do your customers still have cash around? How important is it for them to spend on your new products? And can they actually afford to? In the light of all the other payments they have to make? For example, towards their employee base? And for keeping the core production, manufacturing or information production going?
The second key question is on the other side, the supply chain, something many customers and many scaleups overlook.
Will suppliers stay around?
How long will your suppliers still be around? Are they still around today? Can they still deliver to you or is there something completely blocked in the supply chain, with the logistics being impeded all around the world?
How key are they to us?
So if you think a supplier might be in trouble or might be at risk of dropping out, then you have to understand right away “how key are they to us?” Second question, “how key are we to them?” Because they might also not want to sell to us anymore. The first question is primarily about if we need to find an alternative or a substitute for the supplier?
How key are we to them?
The second question, “how key are we to them?” is there any scope to renegotiate pricing? This is something that can really help in a crisis situation. Suppliers are often desperate to keep their customers as we all are, and so you may be able to renegotiate new pricing with them as long as you can then commit to staying with them for another year or two.
The question about alternatives will require some creative brainstorming, in some cases especially if you’ve really relied on a supplier for a long time.
Now, out of customer value and supply chain, of course, we have to start looking very carefully at cash flow projections.
-25/-50/-75% of Revenues
Generally in the past, we would have recommended: look at a minus 10%, minus 20% and minus 50% scenario. Unfortunately, this crisis in 2020 is so severe that we now recommend to look at far more radical scenarios: minus 25%, minus 50% and minus 75% of revenues. These are very dark scenarios, but it is important to at least have an eye on what could possibly happen. Even if you think that today we’re not yet in that scenario.
Variable/fixed cost measures
In modeling your cash flow projections, your finance people can usually do this quite well, but you’ll want to have the drivers lined up. Between variable and fixed cost measures that you could possibly take. For example, if you think that revenues are not going to be growing much, simply because your customers are not around or because they can no longer spend on your products, you’ll probably will not need as many salespeople as quota goes down. That’s a variable cost in the end. For fixed cost, for example, do you really need to rent that new building? Or do you want to make all these investments in software for the future?
Cash infusion measures
Cash infusion measures: is it possible to draw on a credit line? Is there government support available? If you’re VC-funded, is it possible to do maybe an inside round with some of your current board or investors, just to keep the company alive?
And finally, what are some divestment measures? Is there a unit that you can sell or is there an investment you can defer? Not to spend investment money on it right now, just to conserve more cash for a situation where, in the future, things will get better?
Now, what is most important with these cash flow projections is that you define trigger points in advance. A trigger point is the point by which you move from scenario A to scenario B. Are we going to be following the scenario defined in the minus 50% or in the minus 25%? Well, that is based on today’s situation and then defining in advance what would make us move to the other scenario.
Guard from emotional decisions
What we’re trying to do here is to guard you from emotional decisions. Trying to set in advance: “if things get this bad, then this would be the trigger point for us to move to a different scenario.”
Of course you want to do this on the basis of leading metrics more than lagging metrics. So, for example, taking decisions which scenarios to move to based on the revenues realized last month is probably not a good idea. Because you will be too late. It’s much more important to have this objective figure or ratio based on current activity. For example, how many meetings are our customers taking? How much trouble are our salespeople having even getting through with their calls?
Share metrics but not yardsticks
We can share metrics like this that would maybe make us move from one scenario to the other with a broader set of people, but I recommend not to share the yardsticks. In other words, you could say “we are really closely looking at how many customer meetings we are having.” But we’re not saying “if it’s more than 10 per person per month, then we are in this scenario, and if it’s more than 15 per month then we are in that scenario.” I wouldn’t share specific yardsticks. Otherwise, first, you’ll get people very nervous, and second, of course, they’ll start gaming those numbers just to try and save the company, but it will not really matter.
Know last possible moment to switch
Then, most important about this trigger point is not just to say “when would we switch”, “when it’s reached this certain amount”. But also “is there a retro planning of that last possible moment by which we need to switch.” So in other words, if we know that there’s going to be a second wave of infections in Q3 and Q4 and that would mean that the economy would not revive in time, what would be the last possible moment to switch to a more aggressive cash savings scenario? So that we could survive longer without needing additional investment?
Those are some of the questions we will typically ask in reassessing the reality. What are the truths to give up on? What are some of the new truths to embrace? Look at customer value. Look at your supply chain. Look very carefully at cashflow projections and define your trigger points in advance.
In our next video. We will start looking at giving clear instructions to your people.
To get started right away with bridging the crisis in your startup, go to crisis. We put together all resources there that we’ve mentioned in this video: The crisis action plan, a one page crisis bridging plan, other videos, and more.