Survival is Competitive Differentiation

We’ve read a few articles lately claiming that survival is not a strategy. The arguments in Anand Rajaraman’s article on GigaOM last month are sound, and if we understand them correctly include not prolonging a business that will never likely “win” or be healthy or have an exit resulting in wealth creation for the shareholders. It’s hard, or more appropriately put, impossible to argue with that logic. A quick death of a company that would otherwise die is a good thing for shareholders and employees.

That said, we think it is very hard in these times to look into a crystal ball and figure out if your company will survive beyond the current economic downturn. If you were growing aggressively before the downturn and are either moving sideways or down slightly, then there is a good chance that you can continue to grow once the economy turns around. If you have such a company (rapid growth followed by flat to down coincident with the economic downturn), then investing your capital in additional growth might be suicidal.

Surviving the economic downturn is a requirement for you to grow after the economic downturn. Capital, including both debt and equity, is not likely to be easy to come by for some time and even if you can get it, it will come at a premium (debt) or discount (equity) to what you would like to have in a more nurturing economic environment. As such, creating a “healthy” business defined by positive cash flow is paramount to survival. Being able to live off what you kill and grow for the coming months will ensure that you have a chance to thrive in the next economic boom. Moreover, you may exit the downturn with fewer competitors and a better opportunity for the “home run.”

Here are our recommendations on what you can do NOW to survive and thrive.

  1. Cash is king. This was always true, even when the laws of business seemed to be turned on their head and capital flowed freely after a 5-minute presentation that included the words “software as a service.” Get to cash flow positive and stay there. Forget about the income statement — if you are spending less than you are making, then that’s all that matters today.
  2. Justify your organization. Even if you are cash flow positive, you should be looking during these times to make sure that you are cutting every piece of non-performing fat from your organization. Keep the folks you need to do the work that is contributing to profitability and remove your underperformers. Interview for superior performers so that you can hire them into positions when the market turns around.
  3. Eliminate debt. If you are highly leveraged and you have the money to do so, use every penny that you can muster to eliminate debt. Amazingly enough, it may be cheaper to buy your debt back and retire it if the debt is trading below the issuing value. For instance, if your debt is trading at 50 percent of the original value upon issuance and you can retire it upon purchase then every dollar you spend on purchasing debt nets you twice the benefit of paying the debt down. Even if you can’t retire it, you’ll get a portion of every dollar back that you spend on buying down your debt. Either way, use this time to make your balance sheet healthy.
  4. Justify your projects. Don’t continue to throw money into projects that have extremely long payback horizons. If you are going to continue major project spend, then spend that money on items with nearer term profitability targets. As we have said before, success is a function of focusing on the right market opportunities, building the right product for that market opportunity, and building that product the right way. If you are on a sinking ship, is it better to spend your time finding a lifeboat or would you rather be balancing your checkbook?
  5. Fix your product. The guiding words for your product roadmap should be focus and simplify. Focus your product features on ones that make connections. Depending on your services, these might be: helping customers connect with the information (like search engines or technical blogs), connecting with other customers (think eBay, Etsy, or Craigslist), or connecting customers with products (Amazon). The takeaway is that the part of your service that makes the connection is the valuable part. Simpler applications that are well built beat complex, full-featured applications that are buggy and confusing to the user.  Learn to say “no” to projects, and clean up the application.

Marty Abbott and Michael Fisher are partners with AKF Partners.

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