Now what?!
The complexity of a crisis
The below is a note I wrote to the CEO of a company I am a small investor in. The name of the company or the sector it’s in don’t really matter in this case. Being at a small firm myself i think the below is almost universally applicable and relevant to business leaders in any field.
Part of the note was inspired by the brilliant letter Sequoia Capital sent its portfolio companies at the start of the month. You can find it here.
Hi Founder X,
Thanks for the update. It’s great to see that you guys are taking this seriously and making the necessary adjustments to your business.
As an investor in Company X (albeit small) I have some thoughts that I’d like to share with you, which might help you in this uncertain period.
For some context, I have been investing my time, energy and capital in public and private markets since 2013. Personally, I haven’t lived through a full financial crisis yet, but I believe the diverse experience and exposure I have gives me some edge.
I’m a senior manager at a fast-growing financial media firm and over the last several years have worked in or led teams that have raised tens of millions (USD) in funding and brought tens of millions (USD) in revenue (B2C/B2B). I am exposed daily to what’s happening in markets and the global economy, and to the views and analysis of some of the smartest analysts and fund managers out there, who have seen it all. Also, I have very close friends at some of the largest hedge funds and investment banks.
As an investor in Company X I feel a duty to share my thoughts with you. I am a supporter of the business in good and bad. I am here for the journey and not just for the potential financial reward at the end. Of course, you are the majority owner and operator of this business and I am humble enough to admit that I do not understand all the intricacies that feed into your decisions daily. So, take this as a top down view of where I think the world is headed and use it as one of many inputs into your decision-making process.
Best
George
What we have experienced over the last few weeks has been absolutely unprecedented. We are truly in uncharted waters. Every living generation has its defining moment, and this is likely going to be ours. It’s not about the US, Europe, China or any other country. It’s not about gender, race or status. As my boss says, this is likely going to be the largest event of our lifetimes.
Let’s be clear about something – this is not transitory!
I still see the majority think this is a transitory event that will be over in a few weeks and we will be back to normal. To say this is wishful thinking would be an understatement. We will be lucky if this ends up being just a recession. Chances are it will be a depression on a global scale…
Over the course of two weeks the developed world has basically shut down…
Countries in Europe are under a varying degree of a military lock-down, with imposed strict curfew. This is coming to the US (way too slow unfortunately). You basically cannot freely go out in the free world anymore…
Commercial air travel has been limited and most European borders have been closed
Every major social gathering (music, sports, entertainment, art etc) until mid-summer has been cancelled. Olympics next. Billions of immediate and expected future revenue lost…
Restaurant industry has basically shut down across US and Europe, with only a handful of places managing to pivot to delivery
Motor vehicle production in Europe has stopped (23% world total) and US will be there in days, while China is attempting to restart. Just as an example of how manufacturing sector is doing…
Many trillions of dollars will be spent across fiscal and monetary policies, with some unprecedented measures already announced. Handing out checks to all citizens is actually on the cards. Checks?! If that is not a depression then I don’t know what is…
The list goes on and on, but I think the point is clear. This is an unprecedented shock to the global economy, and no one is prepared. The global stock market has lost $21 trillion (30%) so far in less than a month…
MSCI All Country World Index, Market Cap
The industries mentioned above are the backbone of the global economy and they have seized to function basically overnight. Restaurant industry sales are 4 percent of the U.S. GDP and employ 10% of all workers in the country. On Sunday everything is fine and then less than 2 weeks later the whole industry is out of business…
On Thursday the US will report the latest number of initial jobless claims, which is expected to hit 1.5-2m – all time high and 2-3x the level during the 2008 financial crisis (previous highest). Literally off the charts…
US GDP will be down 20-25% next quarter. Straight line down. Incredible…
Unemployment in parts of Europe will probably go back up to 25%+...
Charts and numbers rarely tell the human story of pain, suffering and sacrifice, so here is an Instagram photo from the main room of a restaurant (name irrelevant). It’s a bit ironic that Instagram, the platform that basically invented food porn and empowered the relentless industry boom over the last decade, is now capturing live its overnight demise…
This is not a linear function. A business can literally close overnight (as we’ve seen), but if it stays closed for more than 1-2 weeks it will take considerable time and capital to restart and go back to previous output levels, and it’s not a certainty. Supply chains get damaged (or evaporate), employees find any new paying job to survive, customers find a substitute or just adapt to life without that product/service. This is simply an untenable situation for many small businesses who have less than a month of cash on hand at any point in time…
This is poker, not chess
We think we can see all moving pieces and assess all future moves, but we’ve been playing the wrong game…We’ve brought a chess board to a high-stakes poker game, where odds change all the time and you have different players with different incentives playing against you, everyone is making decisions in real time, with real money on the line. Oh, and the dealer is drunk!
At the start of the month everything was fine…fast forward to today and the developed world is locked at home and half the economy is not operational…
The GREAT reset
In many ways this will be a great reset. Many businesses and industries will simply not come out alive on the other side. While others will thrive and new ones will be started. Through tremendous pain, loss and sacrifice we humans will be pushed to the edge and will have to rebuild, rethink and reinvent.
This provides tremendous opportunity, but only to those that are in the position to take advantage of it.
The best offence is defence
Now that the stage is set, I hope you can see how serious the situation is. This is not just another mass-hysteria we will forget about tomorrow. It’s of historic proportion.
So, I urge you, as you and your leadership team are going through scenario planning and looking to ensure business continuity, consider the following:
Do you really have as much runway as you think? What if occupancy drops by 50%? What if you have to shut down the space tomorrow because someone is sick? Could you withstand a few poor quarters if the economy suffers tremendously? Have you made contingency plans for a situation as severe?
Reminder: This is poker and not chess. You might think you have the answer to all of the above, but I can assure you (with reasonable confidence) that your clients haven’t thought of this in such detail. And if they have, then their clients haven’t. Complexity galore! Everything is just starting, and many firms are yet to feel the pain. US closed a few days ago and the effects are yet to reach all geographies and parts of the economy:
KPIs will start sliding
Targets will be missed
The solid sales pipelines companies had two weeks ago are now worth 0 Renewals might be fine (for essentials), but new deals will not go through. The most important thing right now to a firm is “business continuity”. Everything else is on hold. And as a reminder, this is non-linear - once the dust settles it will take time for firms to move back to the office and get everything going. Only then they will consider re-opening some of the old relationships. Any firm with advertising and/or non-recurring revenue being a high % of their total is at a serious risk.
Existing hiring plans are now 0
Financing rounds will not get closed
VCs are in a very strong position here – they have plenty of cash and know there will be a tone of cheap opportunities when the situation clears…they’ve seen this before. Conversely, bridge financings that are happening will be at lower valuations and very strong terms, often leading to cost cutting (staff). From their point of view this is a great opportunity to clean the portfolio and let the weak players go out the door.
And sometimes, it’s not going to be up to the VCs. Their LPs are now 10-30% down for the year (remember the $21tn lost?), so in some cases there won’t be anyone there to pick up the phone when VC is calling in some of the funds…
To quote an acquaintance from the M&A world - “Yeah, deals are being affected. On hold, dead, or they have to put special clauses in the agreement, or buyer getting discounts”
The big wave of startup failures has already started and is about to accelerate. Beware!
Where could you trim expenses without fundamentally hurting the business? Ask these questions now to avoid potentially painful future consequences. Now is the time!
Staff cuts are incredibly painful and are a definite hit to the culture…but if there is ever a time to sacrifice a few players for the survival of the rest of the team, it is now. Or maybe get ready to cut salaries by 30%. Or maybe both. You don’t have to discuss all this with colleagues, but you as the leader need to be aware of these scenarios and be ready to pull the trigger if the time comes. As they say – better have a plan and not need it than need it and not have it.
From chaos comes opportunity
All this might sound very grim, but as I said, there will be plenty of opportunity for the prepared. Luck favours the prepared…chaos too.
Most firms will not be ready for all that is about to come, including your competitors. This will provide you with the opportunity to acquire new business, talent and relationships.
The commercial lending environment in Europe will get incredibly favourable. You will basically be paid to take on a bank loan, so there will be good opportunities for re-financing and new long-term loans.
Also, property prices will likely come down as unemployment increases and travel struggles to go back to normal levels. There will likely be entire buildings used for Airbnb listing that will be up for grabs for cents on the dollar. Your bargaining power with landlords should be high.
(Purely anecdotal evidence)
And when all is said and done, if this proves to be nothing but fear mongering, then I will be the first one to admit that. But you cannot afford for me to be right and you not to be prepared. This is a Pascal wager you don’t want to be on the wrong side of. The health of the business is on the line, a lot of opportunity is on the line…now is the time to act!
I will leave you with a quote from Timothy Gallway’s excellent The Inner Game of Tennis:
Perhaps the most indispensable tool for human beings in modern times is the ability to remain calm in the midst of rapid and unsettling changes. The people who will best survive the present age are the ones Kipling described as “those who can keep their heads while all about are losing theirs.” Inner stability is achieved not by burying one’s head in the sand at the sight of danger, but by acquiring the ability to see the true nature of what is happening and to respond appropriately.
Stay safe, be strong and know that I am always here to help. And of course…good luck!
G