Survival Guide

Survival Guide

Surviving a rip tide, orpractical tips for executing in a

tough environment

How to survive a rip tide• Rip tides are long, narrow bands of water that quickly pull any objects in

them away from shore and out to sea.• They are dangerous, but are relatively easy to escape if you stay calm.• Do not struggle against the current. Most riptide deaths are not caused by the tides themselves. People often become exhausted struggling against the current, and cannot make it back to shore.• Do not swim toward shore. You will be fighting the current, and you will lose.• Swim parallel to shore, across the current. Generally speaking, a riptide is

less than 100 ft. wide, so swimming beyond it should not be too difficult.• If you cannot swim out of the riptide, float on your back and allow the riptide

to take you away from shore until you are beyond the pull of the current. Riptides generally subside 50 to 100 yards from shore. Once the riptidesubsides, swim parallel to shore and then back to shore.

Source: Popular Mechanics, December 2003, “Worse-case scenarios: How to Survive a Riptide”

Foreword• Many of the suggestions contained in this

presentation were made in previous works• Unfortunately, however, some of the concepts are

hard to grasp and, as a result, have yet to sink in• The purpose of this guide is to elaborate on certain

key points and reiterate their importance• Hopefully, this will help entrepreneurs and CEOs

absorb the suggestions and be in a better positionto execute upon them

You are facing a new opponent• In boxing, you change your strategy according to the characteristics of your opponent.

• When you are fighting an opponent who has a longer reach than you, the secret is to get inside because itremoves his or her reach advantage.

• Conversely, when you are fighting an opponent who has a shorter reach, the secret is to leverage your reachadvantage by picking him or her apart from the outside.

• What has happened in recent months is that your opponent has changed.

• Whereas nine months ago, your opponent was a rival venture-backed company, your new rival is theeconomy.

• Since you are facing a new opponent, you need to change your strategy.

• Nine months ago, the way you defeated your opponent was by being first to market and acquiring a criticalmass of users, but the characteristics of your new opponent are different, requiring a new approach.

• The secret to defeating this opponent, is to win by attrition.

• Don’t slug it out toe-to-toe, conserve your energy and defeat your opponent by outlasting him.

In case it wasn’t clear…

• We are in a new environment• The new environment necessitates a

change in strategy• Rather than being first to market or

amassing users, your new goal shouldbe to avoid running out of money

GoalsYesterday Today

(1) Be first to market

(2) Gain critical mass

(1) Avoid running out of $








(9) Be first to market

(10) Gain critical mass

Guiding principle

• As CEO, you and your team need topursue this goal with the same zeal,creativity, and enthusiasm that youonce directed toward being first tomarket and gaining users.

What to do:

• Understand what is happening• Figure out how it will impact your company• Adapt to the new environment• Execute

What NOT to do:

• freeze• get depressed• panic• act rashly• lose your moral compass• give up

Giving up• In his book, “A Life Decoded”, Synthetic Genomics founder, J.

Craig Venter, tells a story about how, when he was working as amedic in Vietnam, patients who were gravely wounded wouldsometimes live beyond anyone's expectations, while patientswho should have recovered, would sometimes give up and die.

• Venter uses the example to illustrate his belief in the strength ofwillpower and the human spirit, but this is also an apt metaphorfor entrepreneurs.

• Specifically, those who fight, can beat the odds and survive,while those who give up, perish.

• So, don’t give up, keep fighting!

Understand what is going on:

• For an excellent explanation of what isgoing on and how it happened, read theSequoia and Mary Meekerpresentations, or the Bill Gurley memo,links to which are appended hereto.

Likely effects of the crisis

• Radically lower consumer spending• Dramatically lower corporate spending• Less access to capital• Lower valuations• Longer time to liquidity

How will the crisis effect you?

• How will the economy effect yourcustomers?

• How will changes in your customers’spending effect your company?

What works in this environment?

• Target products or services which:– Reduce expenses– Increase revenues– Allow customers to do more with their

existing infrastructure– Do not require your customers to make a

large upfront investment

Example: EnerNOC

• Utility infrastructure in the US dates from the 1950’s• EnerNOC uses cognitive computing to, among

other things, optimize the flow of electricity over thegrid

• This allows utilities to offer new services and getmore out of their existing physical infrastructurewithout having to invest in costly new capitalexpenditures

• Saves customers money in concrete ways andgenerates additional revenue opportunities withoutrequiring radical upfront investment

Renew focus on demand

• Focus on customer demand: what canyour customers absolutely not livewithout (as opposed to something thatwould merely add some marginal value)

Important questions to ask

• Does my customer need my product or service?• Do they have the money to pay for it?• Is there a customer who will purchase my product

or service independent of what is happening in theeconomy?

• Focus on clients that will spend money no matterwhat, ex. During the last downturn, IDEO shiftedfrom providing services to Fortune 500 companies,to NASA.

Assess current financial position*

• How much cash do you have in the bank?• What is the burn rate?• How long is the runway (months of cash)?• How many months until break-even?

* Please note that these are facts, not variables.

A note regarding self diagnosis

• Be realistic and brutally honest• Environment has changed dramatically,

assumptions must also change• Don’t hold onto old assumptions, throw them out and

start again from scratch• Revisit all assumptions and submit them to a stress

test (challenge your assumptions)• Beware self-deception and rationalization

Self diagnosis

• Does the company’s business proposition stillmake sense given the new environment?

• If not, what can you do to change it?• Are you doing everything that you can to focus?• Are there initiatives that no longer make sense?• Are you a platform or a feature? (Be honest!)• Should you merge with another company?• Should you shut the company down?

Execution

• Once you have finished the diagnosis, time toexecute

• Act decisively, but use considered action• Avoid knee-jerk reactions• Make cuts all at once, don’t stagger them

(seriatum cuts kill morale and destroy momentum)• Recognize your limitations, are you capable of

doing what is required? If not, find someone who is.

Be a leader

• Your employees, customers, andinvestors are counting on you

• Now is the time to lead• Be flexible and adapt• Exercise discipline• Make the hard decisions• Take charge of the situation, don’t let

the situation take charge of you!

Goal is to become self-sufficient

• Do everything that you can to extendyour runway

• Get to break-even• Become cash-flow positive

Three ways of extending runway

• Cut costs• Increase revenue• Raise additional capital

Cost containment*• Go through your budget line by line• Where possible, shift from fixed to variable costs• Try to reduce recurring costs like rent, salaries,

utilities, phone, G&A expenses, etc.• Negotiate reductions with your vendors and

service providers, barter• Avoid entering into long term contracts, where

possible, as prices will likely fall• Share facilities and other resources• Don’t spend money until you absolutely must

* Some people are great at this, if you aren’t, find someone who is

Labor

• Get creative with compensation strategies (shiftsalaries from fixed to variable, cut base andincrease performance-based component)

• Tie hiring to milestones on the sales side• Don’t hire in anticipation of growth, grow, then hire• Ask employees to voluntarily take reductions• Review whether positions are part-time or full-time• Explore alternatives like outsourcing

A painful challenge

• Entrepreneurs are in the business tobuild companies, not reduce them.

• Reducing a company--whetherheadcount or product lines--is one ofthe most painful challenges anentrepreneur ever has to face

• Unfortunately, in down cycles, it is oftena necessary evil

Reducing headcount

• How do you figure out who to layoff?• How do you figure out how deep to cut?• How do you conduct the process?

Choosing who to lay off

• Drop the least productive• Let go of people who are in areas or

functions that are no longer essential

Determining essential areas

• Start with the company’s core product orservice and work your way backwards(remember, the product or service may havechanged in light of economic conditions)

• What products/services are essential?• Is this position no longer necessary?• Is this mission-critical or can it be

outsourced?• Is this task better performed by a consultant?

Conducting the process

• The day before, announce that there will bean all hands meeting

• Get everyone together in the morning• Explain that you are proud of everyone’s

work, that the company is going to survive,but that, due to the downturn, the companyneeds to reduce its headcount

• Tell them that you will be eliminating, ex. 15positions

Conducting the process

• Treat employees as well as possible• Logistics of how it is done make all the

difference, ex. have boxes for people to use• Figure out the migration of email, return of

computers and cell phones, etc. beforehand• Make it as humane as possible• Do everything that you can to preserve

dignity

Conducting the process• Inform staff that you will be holding meetings beginning at 11 am• Ask them to please stay by their desks• Goal is to avoid people feeling angry or humiliated• Meetings should be short, 10-15 minutes max.• Don’t get into specifics• If people want to talk in detail, schedule a meeting or a call for

another time• Your duty at this point is to inform those affected quickly and get it

over with• Meeting participants should be the person being let go, plus three

or four people• Hold the meetings quickly• Give them time to say goodbye to co-workers, pack up, and leave• Do this before lunch so you get everything done with

Conducting the process• After lunch, once the affected employees are

gone, gather everyone together again• This will not be a happy event• Be professional• Explain to everyone what happened and why• The goal is to reassure employees who

remain and to restore confidence• A few days later have pizza at the office

(make sure that it is not expensive, otherwiseyou are sending mixed messages aboutcutting costs), and begin to restore morale

Increasing revenues• Extremely difficult since everyone is cutting costs• Revisit your core product or service to see if there

are any ways of extracting additional revenue• Acquire customers from weaker competitors• Get creative• Partner, acquire, or merge with a company offering

complementary products or services or with acomplementary sales channel

• In rare circumstances, consolidate and extendmarket share

Raising additional capital

• Don’t count on getting bailed out by futurerounds of funding

• Money, if it can be raised at all, will bedifficult to obtain

• It will take longer to raise• It will be at a lower valuation• Cost of capital has increased dramatically

Assuming that you can raiseadditional capital

• Raise enough to get to profitability, andperhaps more

• Be prepared to demonstrate:– A track record of meeting milestones– A working, non-advertising monetization model

• Show investors:– That you understand the new economic reality– That you have a clear plan to profit from it

Exits

• Initial public offering window is closed• Mergers and acquisitions extremely difficult

Mergers and acquisitions

• Normal acquirers, large corporations,have their own problems

• Very little credit available to financeacquisitions

• Debt markets are prohibitively expensive• Public market valuations have collapsed,

reducing private company valuations

What are they looking for?

• Proven sales/monetization models• Track record of hitting milestones• Crucial market share or technology• Public companies will only acquire

companies that are profitable or atbreak-even, since they don’t want todilute their earnings

Company image

• Be proactive in managing the company’simage, particularly if you are conducting lay-offs

• Keep customers, investors, suppliers, andpartners informed and address their concerns

• Be careful not to send mixed signals, ex. laypeople off, then Twitter or post photos onFacebook inconsistent with the gravity of thesituation

Morale and motivation

• Be proactive in managing employee morale,especially in the aftermath of cuts

• Share information (do not hoard it or keepemployees in the dark)

• Manage employees’ expectations• Redouble your efforts to cultivate a sense of

camaraderie• Come up with creative (non-monetary) ways

of rewarding employees

Communicate

• Don’t hide problems, delay delivering bad news,or put everything on yourself

• Talk with members of your executive team, theCEOs of other start-ups, investors, and friends

• There is no shame in experiencing difficulties orhaving questions, everyone is in the same boat

• Chances are, someone has faced the problembefore and knows how to help!

Moral compass

• Difficult circumstances can sometimes causepeople to panic and behave in ways that theynormally would not

• Be careful not to lose your moral compass• If you are unsure of the morality of an act, use

the New York Times test, i.e.Don’t do anything that you would not beproud to have your family, friends, andcolleagues read about on the front page ofthe New York Times

Opportunities created by thedownturn

• Increased ability to cherry-pick (recruit) the bestemployees, since there will be fewer companies

• Chance to consolidate and extend market shareby identifying competitors weakened by thecrisis and acquiring their customers

• Competition should revert to “normal” levels,since there will be fewer well-funded, duplicativecompanies

Conclusions• Entrepreneurs and CEOs face the worst

economic conditions since the GreatDepression.

• Those that can harness their drive andcreativity to adapt and execute in thistough environment, however, will havea strong chance of not only surviving,but flourishing, once the economy turnsaround.

• So, save your energy and swim parallelto shore!

Additional resources• Sequoia presentation: http://www.slideshare.net/eldon/sequoia-capital-on-startups-and-the-economic-downturn-presentation?type=powerpoint

• Bill Gurley memo: http://www.techcrunch.com/2008/10/09/benchmark-capital-advises-startups-to-conserve-capital/

• Ron Conway email: http://www.techcrunch.com/2008/10/08/angel-investor-ron-conway-adresses-his-portfolio-companies-over-financial-meltdown/

• PE Hub Interview, A Q&A With Silicon Valley's "Undertaker": http://www.pehub.com/21573/a-qa-with-silicon-valleys-undertaker/

• Mary Meeker, Web 2.0 Presentation: http://www.slideshare.net/hblodget/mary-meeker-web-20-presentation-presentation?type=powerpoint

• John Doerr, VentureBeat Roundtable: http://venturebeat.com/2008/10/29/john-doerr-10-ways-for-companies-to-stay-afloat-in-rough-times/

• John Borthwick memo: http://www.alleyinsider.com/2008/12/startup-advice-how-to-make-the-collapse-work-for-you

• Jason Calacanis blog post: http://calacanis.com/2008/09/29/the-startup-depression/

Disclaimer• This presentation was written and compiled by Simon Olson, a partner

at DFJ FIR Capital, Draper Fisher Jurvetson’s Global Network partnerin Brazil. All thoughts and opinions expressed herein are his own anddo not reflect the thoughts or opinions of Draper Fisher Jurvetson orany of the Network Funds. Responsibility for any intelligent ideascontained herein lies with Simon’s colleagues from the DFJ GlobalNetwork who graciously contributed ideas for this presentation.Responsibility for any errors lies with Simon alone. Special thanks toDan Miller for his insightful comments on how to conduct the layoffprocess.

Economy & Finance

Survival Guide