July 13, 2015
Economic downturns are one of those events for which there are no written rules. There are no courses that prepare you for the multitude of “what if” scenarios that can unfold when it strikes.
I’ve had the ‘pleasure’ of experiencing two downturns in very different ways.
My first economic downturn came in 2000. I had just left the relative stability of McKinsey & Company, ready to make my billions in the internet space. I joined an early stage venture fund and incubator exactly 4 days before the dot-com driven NASDAQ peaked on Friday, March 10, 2000. It was impeccable timing.
When the bubble burst, I was in the thick of the sector that drove the recession that caused $5 trillion in losses on the Nasdaq alone. But I was a few rungs down on the totem pole at the company, so it wasn’t my neck that was on the line – or my money. It didn’t crush me the same way that the recession (depression?) did nearly 8 years later.
Fast forward to the global financial crisis of 2008-2010, and it’s an entirely different story. This time, I found myself in the position of business owner. I started HighPoint Associates six years earlier. The company had built a good base and had been on a nice upward trajectory for a few years – who would’ve thought we needed to be prepared to weather a downside that cost global markets more than $15 trillion?
The global financial crisis kicked us hard in the gut, as it did many others. I scrambled to find a way to conserve every penny. We canceled every subscription, recycled docs to print on the flip side (something I still do to this day, on the same black & white printer from back then), froze salaries (I forwent any compensation for 2 years) – anything we could do to reduce or eliminate every possible expense without losing the core team or potentially, the company. I learned a number of lessons the hard way during that time:
- Have a strategy for cash & working capital. Take action when you don’t need it: increase your line of credit in the good times and periodically use it before it’s necessary.
- Don’t forget the downside. In contract negotiations, salary discussions, etc., hope for the best, but prepare for the worst. Before the crash I was focused more on the upside in the contracts of folks I hired – how that commission structure scaled up, how the salaries would increase with performance, etc., without considering what would happen if I needed to recoup that advance against commissions if someone couldn’t perform, or the downside risk of a guaranteed contract if we suddenly had to downsize.
- It never hurts to ask. I was weaned at McKinsey and as such, I felt it too mercenary to ask a client to pay its bills if they were late – of course we were eventually going to get paid, and we wanted the client to focus on the relationship with us and how we were helping them, not thinking that we were harassing them about money. Well, all of that changed with the financial crisis. Cash was tight, working capital strains were omnipresent. I mentioned my concerns to a fellow entrepreneur and he had the simplest suggestion – “Just ask!” Sure enough, in most cases, the client didn’t even realize that we hadn’t been paid because they were simply forwarding our invoices to accounts payable. Now, we’re religious about following up with clients on day 31 of a net 30-day invoice. And nobody seems to mind. And we get paid on time.
- A bed is a bed. There is fundamentally no difference between the bed in an $800 5-star hotel and a $300 3-star hotel. I was traveling with a client to New York City once and he offered to drop me at my hotel on the way to his. He was staying at The Palace Hotel while I was at the Sheraton. He was incredulous – “The Sheraton? Why would you stay at the Sheraton?” My response – “It’s $250 per night in NYC, has free internet, a nice bed, treadmills and some free weights, a Starbucks in the lobby and access to the subway right outside. What else do I need?” My favorite dinner when I go to NYC? 2 slices of authentic New York pizza and a soda – $5. I’ve even had my finance folks ask me where my dinner expense was because they looked right past the $5!
- Always be looking – for ways to save. No one at HPA rents cars when we travel. We jumped on the Uber train a few years ago and have made it a habit not just with our employees, but with our consultants. No expensive video conferences for us – test for reliability and then use a free/low-cost service. Same with audio conference bridges. And hotels – everyone has an SPG AmEx and the points are then recycled to be used in the highest cost cities when we travel. The list goes on.
Getting through difficult times makes the business and your leadership that much stronger when you finally get to the other side. But seeing the light at the end of the tunnel when you’re in the thick of things can be near impossible. HighPoint was nimble enough to be able to make cuts where we needed, and lean enough to be able to keep our team intact until the markets and business rebounded to pre-recession levels in 2010 (and we’ve been growing ever since). Planning for the downside is the last thing anyone wants to do when the business is running smoothly, but can save you from disaster when it hits.