Startup 121: Lessons for the Recession from Rice Krispies

The past few months have been, how shall I say, pretty crappy and have caused lots of cut backs for most startups (and companies of every size).  Mostly, this has meant laying people off, cutting expenses, and generally “battening down the hatches to weather the storm”.

I randomly had several conversations with people on the topic of what a startup (or any organization) should do in times like these and some basic things came up each time:

1. Measure to manage
2. Mix it up
3. Take calculated risks

Measure to Manage
Today, months into this recession, no one would argue that the economic outlook is negative.  However, often times forecasting is challenging to say the least and usually only accurate in hindsight.  I used to joke with our Board whenever I presented a financial plan that the only thing I could guarantee was that we would miss the numbers.  That did not mean the results would be worse, but that I was positive we would not hit the plan to the penny.  We would be roughly right, which in the words of Kenyes, is better than precisely wrong.

It turns that we were in good company as the record for long term forecasting of macro economic indicators by the “experts” is actually only roughly right in the near term and not so predictive in the long term.  Just like a startup’s financial plan.

The Federal Reserve released a paper at the very beginning of the recession (coincidence?  conspiracy? hmmm…), which analyzed historical accuracy of past economic forecasts such as the Gross Domestic Product (GDP see wikipedia).

OK, I admit, it’s little nerdy thinking that others would be interested in Average Root Mean Squared Forecast Errors but…

The report basically shows that most forecasts of growth are only good one or two quarters out, and beyond that, “…uncertainty about the economic outlook is considerable.” So if it’s hard to forecast a problem, what should a startup do?

In today’s world, measuring things is actually easier than it has ever been – Page views, Click Throughs, Conversion Rates, Leads, Registrations, Trials, you name it.  Startups are actually pretty good at using data and all should have a set of good metrics to manage their business (See previous post If you don’t know where you are doing, well you’re lost).

In a startup this is usually easier than for big companies, but on a business by business basis, this should be possible even in the largest of companies but is something most don’t do well or at all.  And it’s another reason why startups kick corporate booty. Let’s face it, startups are, well, smarter.

Now, all that being said,  metrics need to be leading indicators for what will likely happen in the future as opposed to only lagging indicators.  At Vontu, since we were doing enterprise sales (i.e. 9 months average time from a first prospect meeting to closing a 6 or 7 figure deal), even after having some of our best quarterly sales results, which is a lagging indicator, we were worried about the future because leading indicators, such as product evaluations (or as we called them, risk assessments), were not tracking to our historical averages.  Team attrition is another example of a lagging indicator of a problem, that is to say if people are leaving, the problem already exists.

Now it sounds like I am talking out of both sides of mouth.  And I am.  Even though the Fed is not good with long term forecasting, having 6 months of visibility is still better than none.  To know you have a problem (or an opportunity as the case may be), one can not focus enough on leading indicator metrics.  And if you did not have  the right metrics in place at the start of this recession, consider putting them in place now as you will also be a step ahead in predicting when to accelerate investment as things improve.

Mix It Up
Most startups (and large companies) made big people changes over the past 6-9 months typically in the form of cost cutting and layoffs and sometimes quite significant layoffs both in numbers and percentages. While layoffs are big changes affecting the lives of many people yet help in improving the health of the company for the short term, they are not about dramatic changes in leadership for the long term.

In my opinion, down turns are as good a time as any to make dramatic people decision that you have either been dreading or avoiding for whatever reason. First, there is already so much disruption that throwing some more into the mix won’t make much of a difference.  Secondly, it is somewhat easier to hire great people given the macro-economic turmoil and increased unemployment.  And lastly, everyone on the team already knows who is not performing. You as a manager and leader are usually the last to acknowledge the problem, yet the team expects you to make these tough calls.

Expectations for business results are low today so take the time to make the big people changes and if things get a little messy in the short term, but it’s all relative to the ongoing mess which already exists. And who knows, they may actually be better too.

Take Calculated Risk
My friend Phil forwarded me the New Yorker article “Hanging Tough” by James Surowiecki about what strategy some companies followed during the Great Depression.  An example used two competitive cereal makers, Post and Kellog, and how chose very different market responses.  Post did the standard cost cutting, yet Kellogg invested in advertising and new products and as a result, “Snap, Crackle, Pop!”, Kellogg became the dominant player it is today.  For the same reasons it is a good time to start a company today (less competition, easier to hire, leverage the inevitable economic upswing), companies  should be thinking about investments to be made today as the economy is at its lowest point.

In general, if one keeps an eye on the long term, one should always be making investments.  Unfortunately, as the New Yorker article suggests, uncertainty overtakes risk taking.  This short term uncertainty causes people to focus on what they can control, e.g. costs, as opposed to making smart investments for the future.
Yet history has shown that even during the Great Depression, companies that made good investments did well.  Even the stock market came back more quickly than people remember.

At a recent presentation by Professor Jeremy Siegel from Wharton, he had a slide which stated, “On average, for the seven largest gaps [in performance relative to trends] over the past 145 years, the market has rallied 24% in the following year, 21.4% per year over the next 3 years, and 18.4% per year over the next five years.”

As suggested in the New Yorker, while most people are “battening down the hatches”, you might want to invest as the others might actually just might miss the boat.

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