Coronavirus & Resilience Part I :

Be Prepared for Winter

CV19 is a material adverse change for all of us. It is unlike anything we have faced in our lifetime. It is global, changing very quickly, and has likely to have severe impacts — both personal and business, both known and unknown.

Sadly, we now know all of us will be impacted by the virus either directly or indirectly. We also know it will likely be very stressful for the rest of 2020 as long-lasting health and business impacts. In the interim, we should brace ourselves for turbulence and have a prepared mindset for the scenarios that may play out.

There are some lessons we have learned from the .com market collapse and 9/11 that followed, the great recession, and other unexpected “black swan” events.

Our Biggest Lessons:

1. Be aggressively prepared for the “most likely worst-case scenario.”
2. Over-communicate and Over-listen.

To be clear, the most challenging part of the crisis is that we have never faced anything like this in our lifetime. What we know is that it will change and change dynamically in ways that are hard to predict. We will try to unpack these two lessons and how we are operationalizing them for ourselves, but more importantly how we are hoping our community can come together to be more resilient together.

Our Resources (that we deem credible and worth considering):

• The math of a pandemic — why you need to act now
• Dr. Samir Sinha & Dr. Allison McGerr Infectious Disease Sinai Health System CBC
• Dr. David Seftel Harvard Medical update on CV19
• Dr. Michael Osterholm Chair in Public Health, the director of the Center for Infectious Disease Research and Policy (CIDRAP), Medical School, all at the University of Minnesota
• Stanford Hospital Board of Internal Medicine

Our Communities:

Take aggressive precautions to protect the health and welfare of you, your employees, and your families. Like many, we have studied the available information. It now appears clear that 40–70% of us will get the virus and is 20X more deadly than the flu and much more difficult to mitigate. The virus can last 9 days on a surface, and it can take two minutes of applied “wet” alcohol on a surface to kill the virus. With this in mind, we have come to the conclusion that we should all be taking aggressive steps to mitigate infection and the spread of infection.

• The best case is the CV19 crests in April 2020, but this is less likely and the disease will be with us through the balance of the year. A vaccine is at least 18 months away, and until we have a safe and widely available vaccine we all need to take aggressive steps to minimize the impact of this disease.
• Social distancing is critical for all of us to implement immediately.
• Stay at home as much as possible/telecommute
• Reduce or eliminate physical contact
• Do not travel if at all possible, air travel is not safe, and
• Be very cautious with pre-prepared foods (restaurant, order in, etc)
• 6-foot rule — don’t stand within six feet of each other
• All in the family rule — everyone in the family must follow the rules or the weakest link will become the entry point for infection.

Our Companies:

(Credit to Sequoia Capital’s “Black Swan” article for this section, with Updated BGF commentary in bold)

We are gaining first-hand knowledge of coronavirus’ effects on global business. As with all crises, there are some businesses that stand to benefit. However, most companies are facing challenges as a result of the virus outbreak, including:

● Drop in business activity. Some companies have seen their growth rates drop sharply between December and March. Several companies that were on track are now at risk of missing their Q1–2020 plans as the effects of the virus ripple wider. We anticipate this will become worse through the balance of the year. Not all companies are impacted the same way, but we should all be planning on the “most likely worst-case scenario”.

● Supply chain disruptions. The unprecedented lockdown in China is directly impacting global supply chains. Hardware, direct-to-consumer, and retailing companies may need to find alternative suppliers. Pure software companies are less exposed to supply chain disruptions but remain at risk due to cascading economic effects. This may improve briefly over the early summer and then get worse in the fall.

● Curtailment of travel and canceled meetings. Many companies have banned all “non-essential” travel and some have banned all international travel. While travel companies are directly impacted, all companies that depend on in-person meetings to conduct sales, business development, or partnership discussions are being affected.

We should assume that it will be at least 6–18 months before we can be confident that the virus has been contained and a widely available vaccine is available. It will take even longer for the global economy to recover its footing. While The Fed and other central banks can cut interest rates, monetary policy may prove a blunt tool in alleviating the economic ramifications of a global health crisis.

We suggest you question every assumption about your business, including:

1. Cash runway — “18 months rule” Do you really have as much runway as you think? Could you withstand 6 poor quarters if the economy is down for an extended period? Have you made contingency plans? Where could you trim expenses without fundamentally hurting the business? Ask these questions now to avoid potentially painful future consequences. Have a dynamic 18-month view of your cash flow — checking assumptions weekly.

2. Fundraising. Private financings have softened significantly, as happened in 2001 and 2009. What would you do if fundraising on attractive terms proves difficult in 2020 and 2021? Constraints focus the mind and provide fertile ground for creativity. Some of the most powerful companies have come out of challenging environments. Mostly because they survived and the competition did not.

3. Sales forecasts. Even if you don’t see any direct or immediate exposure for your company, anticipate that your customers may revise their spending habits. Deals that seemed certain may not close. The key is to not be caught flat-footed. Over-communication — both inside your team and externally — is critical. Human nature is to try and hide or obfuscate bad news, it is critical to instill in your team the ability to quickly and accurately report in real-time where the business is so you have the ability to adjust.

4. Marketing. With softening sales, customer lifetime values are likely to decline, in turn suggesting the need to rein in customer acquisition spending to maintain consistent returns on marketing spending. With greater economic and fundraising uncertainty, you should consider raising the bar on ROI for marketing spend.

5. Headcount. Given all of the above stress points on your finances, this might be a time to evaluate critically whether you can do more with less and raise productivity. Rigorously track metrics that allow you to course-correct. Weekly revenue per quota-carrying sales rep or (CAC/LTV) & per employee compared for Y/Y and M/M need to be at the top of your management dashboard.

6. Capital spending. Until you have charted a course to financial independence, examine whether your capital spending plans are sensible in a more uncertain environment. These are decisions that should be deliberate. Having this cash as a reserve can be the difference in making though a six-quarter storm or not.

Having weathered a number of business downturns as operators and investors, we’ve learned an important lesson — nobody ever regrets making fast and decisive adjustments to changing circumstances. In downturns, revenue and cash levels always fall faster than expenses. Your ability to adapt to change is 100% related to the information you have to make decisions, which becomes much harder in this environment. Your ability to have good actionable information is 100% collected to our ability to communicate and listen. False optimism can easily lead you astray and prevent you from making contingency plans or taking bold actions. Avoid this trap by being clinically realistic and acting decisively as circumstances change. Demonstrate the leadership your team needs during this stressful time.

Our Perspective:

Our partner Chris Albinson has lived through another black swan moment as an operating executive:

“I was serving as the CSO of Digital Island when we called a board meeting in September 2001, we had survived the market crash of March of 2000, were in the middle of a sale process for the company. It was a painful 6 quarters of retrenchment and we thought we had a path forward. I was supposed to be on flight UA93 from Newark to SF but had stayed back for the board meeting. My family was in Detroit, we got word of the attack on 9/11 and all planes were grounded. We didn’t know then, just like we don’t know now, how long or how sharp or shallow of a downturn we will face. What I can confirm is that the personal and professional stress was unimaginable. If it wasn’t for the communication and listening we did as a team, we would never have survived. We emerged from the crisis ready to seize on opportunities, able to react and acquire our competitors who had gone from $30B+ public market caps to bankruptcy over the span of six months.” As Darwin surmised, “those who survive are not the strongest or the most intelligent, but the most adaptable to change and they will eventually dominate the ecosystem.”

Our Final Takeaways:

This is a different sort of crisis. It is going to affect everyone, everywhere. It will not just affect our businesses, it will affect our families. But it is also a crisis that we can do something about in real-time, that we can mitigate and make better through decisive action.

Remember:

1. Be aggressively prepared for the “most likely worst-case scenario.”
2. Over-communicate and Over-listen.

Stay healthy, keep your company and community healthy, and most importantly look after each other!

Best,

BreakawayGrowth team!