Roaring out of Recession

March 26, 2010

If you’re reading this, you need to promise me that you will post a comment on what you or your company did on this topic…

Scott Johnson, CEO of AtTask, sent me this paper published by the Harvard Business Review. The paper talks about how companies behave in weak economies, and how that behavior translates into performance post-recession.

The paper focuses on companies that emerged out of recessions with strong platforms for growth, and that were very successful post-recession. Companies like Proctor & Gamble, Apple and Staples. Clearly not expansion stage companies, but still insightful. The idea is that a recession should be used as an opportunity to invest in the business, and not retract. The basic premise is that a recession creates a powerful filter that flushes out poor performing businesses. Therefore, good businesses should use a recession as an opportunity to set up for growth post-recession with the assumption that post-recession there will be significantly lower competition.

The paper divides company behavior in a recession into four primary buckets:

  • Prevention-focused: defensive moves, primarily focused on avoiding losses
  • Promotion-focused: invest more in offensive moves that provide upside benefit
  • Pragmatic: combine defensive and offensive
  • Progressive: deploy the optimal combination of defensive and offensive

Where do I place our portfolio companies and OpenView as their venture capital advisors? I would say that in 2009 we and our companies ended up being bipolar in the prevention-focused and pragmatic buckets. The companies that we advised with a prevention strategy were ones that either had product issues that needed resolution (amazing how a recession exposes product issues) and an inefficient distribution model that needed refinement.

The companies we advised to be pragmatic are ones that had decent distribution economics, good products and were generally well set up. But we still recommended that they be pragmatic in shedding some costs because recessions are a great motivator to optimize resources. That’s another way of saying that a recession is a great motivator to shed B- and C-level performers and keep the A-Players.

The paper then goes on to give some advice on the optimal path to take:

  1. Don’t be too defensive: cut in some areas but invest in others. Across the board cost cutting results in a culture of short minded cost prevention that inhibits innovation and creates a downward psychological cycle. Cost cutting in sales/marketing and discretionary spending should be tuned to what would result in a capital efficient distribution model, but not more. R&D should be cut to non-A players, but not more.
  2. Don’t be too aggressive: I haven’t seen this in any of our companies. Except perhaps in what I call the lag-effect… This is where a company is in denial that the recession will affect it.
  3. Reach for the elusive balance: my interpretation of balance is the following… cut costs immediately by 20-30%, primarily by force-ranking all employees by department and letting go all non A-Players. Harsh, yes. Realistic and effective, yes. What we have found in 2009 with companies that took this approach was that productivity increased among the remaining employees, the senior team became more sharply focused, and overall velocity of those companies increased.
  4. Operational efficiency: this was probably our number one message to the portfolio… Drive for balance by aiming for operational efficiency. And the first place to start in is sales and marketing. I have written before about what it takes to create a profitable distribution model.
  5. Invest in existing and new business: this is where our portfolio companies pulled back, perhaps too much. As costs were reduced through headcount reductions, companies lost a significant portion of their development staff. While that overall increased the remaining team’s velocity, it limited the overall output.

Getting it right for expansion stage technology companies, in my opinion, requires a progressive approach… The right amount of cost reduction that results in the super focused and super talented smaller team that can become the platform for aggressive growth going forward.

So how did your venture capital investors guide you through this recession?
 

The Chief Executive Officer

Firas was previously a venture capitalist at Openview. He has returned to his operational roots and now works as The Chief Executive Officer of Everteam and is also the Founder of <a href="http://nsquaredadvisory.com/">nsquared advisory</a>. Previously, he helped launch a VC fund, start and grow a successful software company and also served time as an obscenely expensive consultant, where he helped multi-billion-dollar companies get their operations back on track.