Although the warning signs of the rapid spread of the new coronavirus around the globe were apparent earlier in the year, the recent imposition of a national emergency in the United States and the closure of the US economy signal a "black swan" event – an event that is both sudden and unexpected, has a dramatic impact, and is often only fully understood in hindsight.
At NGP Capital, with investments spread around the globe – from China to India, all across Europe, and throughout the USA – we have a unique vantage point on this particular "black swan" event. While it is true that we are just now hunkering down in the West, we do see a light at the end of the tunnel as our investments in China start to recover.
"While it is true that we are just now hunkering down in the West, we do see a light at the end of the tunnel as our investments in China start to recover."
In this first of two articles, we will discuss the specific ways some of our companies are navigating their way through this storm, finding ways to not just survive the current crisis, but thrive when the economy turns around. In the second article, we will discuss how startups can make sure they are prepared for the unexpected events that will undoubtedly come in the future.
Navigating through the storm. The most successful companies are not just surviving the current crisis, but are doing what is necessary to come out on the other side in a position to capture market share when the economy returns to growth.
- Leadership: Several of our CEOs have demonstrated remarkable leadership during this crisis. Through frequent, honest, and transparent communication, the leaders of companies such as GetYourGuide, Kaltura, SecurityScorecard, and Pubmatic have worked hard to keep all of their stakeholders apprised of the reality of the changing situation in their companies. Recognizing that everyone is nervous in this environment, these companies ensure that all of their stakeholders – employees, customers, and investors – are kept in the loop. They are taking specific steps to ensure that employees and their families are safe as well as physically and mentally healthy through this downturn. How leaders manage and motivate their employees now will undoubtedly determine the long-term outcome of their businesses in the future.
"How leaders manage and motivate their employees now will undoubtedly determine the long-term outcome of their businesses in the future."
- Demonstrating generosity to customers: Where their financial abilities allow, many of our companies are trying to help their customers by offering free services. For example, Kaltura is offering free online video and lecture capabilities to non-profits and educational institutions for the remainder of the year. Babbel is offering their popular language-learning app free to K-12 students stuck at home. Even though there is a high probability that many of these customers will not convert to paid services, these companies realize that doing the right thing now is the ultimate customer retention strategy.
"Companies realize that doing the right thing now is the ultimate customer retention strategy."
- Confronting reality with empathy: When they have no choice but to reduce headcount, many of our CEOs are first choosing to furlough their employees and pay for their benefits, especially when it is clear that these employees will be needed when the company reopens. But, when they must, they are willing to make the tough decision to cut costs and let people go, in order to ensure that the organization can survive through the downturn. Our best CEOs have been both soft-hearted, for example, ensuring that even when people must be let go, they can keep their benefits, as well as hard-headed and pragmatic about the reality they need to confront.
"When they have no choice but to reduce headcount, many of our CEOs are first choosing to furlough their employees and pay for their benefits."
- Scenario planning: Unfortunately, in most startups, scenario planning often focuses on a base case and an upside case. Rarely do we see an operating plan that considers downside or worst-case scenarios in the planning cycle. In the current crisis, however, the wisdom of scenario planning is becoming apparent. The best leaders are not only planning for downside and worst-case scenarios, but are executing quickly on them. They are also reviewing their assumptions daily as they get new information from the market. Security Scorecard has created a daily war room, with functional leaders collaborating virtually to track the performance of their company across all dimensions including their current pipeline. Both Pubmatic and GetYourGuide are adjusting quickly to the new realities of advertising and travel spending, respectively, but are being vigilant so that they can scale up as market conditions improve.
"In the current crisis, however, the wisdom of scenario planning is becoming apparent."
- Continuing to invest in product: When cutting staff, the natural temptation is to cut high-salaried technologists first, because there is a reluctance to cut the salespeople who will "deliver the numbers." Contrary to this, resilient startups continue to invest in their products and expand their differentiation when the market gets tough, while cutting the sales and marketing functions until the market recovers. We are encouraged to see that most of our portfolio companies are continuing to invest in innovation or even fast-tracking their product release schedules.
"When cutting staff, the natural temptation is to cut high-salaried technologists first, because there is a reluctance to cut the salespeople who will "deliver the numbers."
In sports, there is a saying: "Races are won on the uphill." Crises are bitter medicine. But with persistence, pluck, and a little luck, great leaders find ways to survive and thrive through these crises.
These leaders know that once the storm ends, there will be opportunities: to win new customers, to get into new markets, to increase product innovation, and to consolidate the industry.
Finally, to quote the "Stockdale paradox.” When they asked Admiral Stockdale how he survived prison in Vietnam, he said, "I was always optimistic I would get out." When they asked him, "Why did the others not get out?" he responded, "I didn't think I'd get out by Christmas." By balancing optimism with realism – by acting as a team, moving with urgency, and being adaptable to change – our companies will get through this crisis and win.
Read the second article in the series: The resilient startup II: Extending the cash runway