Key Takeaways
- The difference between a company’s overcoming adversity in a recession and having no choice but to close its doors often comes down to leadership.
- For the wartime CEO, decisive leadership is key.
- The CEO must take a data-drive approach to understanding every aspect of her business and she must use that approach to inform her decisions.
The battle on the front lines of innovation
Typical recessions take a while to hit, and economists often debate whether the economy is in a recession well after the recession is under way. This time around, with weekly unemployment filings 10 times higher than the previous record and many small businesses shuttered for the foreseeable future, there is little question that we are in a recession. For peacetime CEOs who have grown their businesses in the calm brought on by the longest bull market in history, the change is rapid and requires a definitive shift in leadership style. Ben Horowitz sums up the shift well in his 2011 article Peacetime CEO/Wartime CEO:
Recently, SVB hosted a Founder’s Table Dinner on Zoom to discuss leadership during a crisis with enterprise software CEOs/founders — a diverse group in terms of gender, experience and stage of company. Although these trying times make for difficult conversations and decisions, I left the discussion feeling energized by these founders’ steely-eyed determination and the optimism that showed through their every anecdote, idea and nugget of wisdom. I want to share key takeaways from this discussion to help guide founders of high-growth companies as they weather the COVID-19 storm.
CEO leadership style
The difference between a company’s overcoming adversity in a recession and having no choice but to close its doors often comes down to leadership. When times are good and business is booming, the CEO’s role is to facilitate growth by encouraging creativity and exploring opportunities. But as belts tighten, being decisive is key. Your employees will follow you and recognize that in rapidly changing environments acting quickly and decisively to focus on the core business and minimize losses supersedes group decisions.
In wartime situations, recognize that your time is the companies’ single greatest asset. Leverage it wisely by staying focused on the foremost issues facing your business.
Cutting costs
As revenue streams decline and equity funding options dry up, how a CEO manages company spend determines the company’s runway. To balance necessary spending vs. what can be cut, CEOs must take a data-driven approach to understanding every aspect of the business. Focusing on data allows CEOs to avoid the emotional quagmire of determining where to cut costs during an already difficult time.
Developing numerous plans for cutting costs from best-case to worst-case scenarios — with well-defined triggers on when to implement plans — makes it easier to act decisively and improve a wartime CEO’s probability of success. While the goal, of course, is not to implement the worst-case scenario plan, the exercise is valuable because it helps bring clarity to what is needed to sustain the core business.
Before making cuts, however, the CEO should contact all of the company’s vendors — including its landlord — and renegotiate terms. Because many startups with venture funding have cash on hand and depend less on recurring revenue, you can offer to pay up-front in exchange for lower rates. This may ultimately extend your runway. Furthermore, SVB provided certain venture debt borrowers with loans $10 million or less an opportunity to defer their principal payments for a period of six months through our COVID-19 relief program.
If cuts are necessary for survival, be decisive and recognize that these are necessary hardships to keep the company going.
Culture: Mission is everything
Because maintaining the core business during a recession is the goal, culturally the focus must be on aligning employees with the mission and letting the noise fall to the wayside.
This recession is unique in that most of us are working from home, so social interactions and workplace culture are largely nonexistent. CEOs must acknowledge the circumstances and actively destigmatize kids running through Zoom calls, working out in the middle of the day, or the numerous other activities we do to stay sane while sheltering in place.
Perhaps most importantly, remember that as CEO you can lead by example. Stay mission-driven and don’t expect employees to make sacrifices that you do not make yourself.
Fundraising in a crisis
How venture capitalists perceive and measure companies has shifted, and equity financing deals have begun to slow; yet beyond the cursory signs of a slowdown, the impact on financing in the current environment is still unclear.
As with previous downturns, top-performing companies will likely continue to raise capital, while the rest will find it much more difficult. For all companies, the fundraising process will likely take longer.
Thus, companies must take their destiny into their own hands and recognize that to survive they will have to cut spending and stay focused on their core directive.
Change in U.S. VC Deals from the Previous Year (2019-20)
Source: Pitchbook
Turning to debt to extend the runway
Given the tightening of equity financing, many startups are turning to debt to extend their runway. While Paycheck Protection Program loans through the CARES Act are the first debt-financing option most companies are turning to, there are many alternatives, from venture debt to asset-backed lending and credit lines. Debt financing can be complicated, however, and it doesn’t make sense for all startups.
Silicon Valley Bank has more than three decades of experience serving the innovation economy and working with startups as a business partner and debt-financing provider. If you are interested in exploring financing options that might make sense for your company or are simply looking for guidance in these uncertain times, please don’t hesitate to reach out. We are here to support the people, companies and funds that power the economy of tomorrow, today.