Defining an organization’s culture as a “Family” culture reflects tolerance to subpar performance. Rather focus on those characteristics of a “family” culture that you want.
As we progress through the recession, many commentators are saying that recessions are a great time to start a business. To validate their argument, they point to some of the great companies that got their start during a recession, e.g.
- Netflix, 1997
- Airbnb, 2008
- Trader Joe’s, 1958
- Microsoft, 1975
- Sports Illustrated, 1954
- MTV, 1981
- GE, 1890
- IBM, 1896
- Warby Parker, 2010
- Revlon, 1932
- Disney, 1929
Many arguments are justifying why starting a business during a recession is a great time. A summary is:
- Surviving = Winning. During a recession, just surviving is hard. If you survive during such times with limited capital and profits, you will be well-positioned to survive during good times. Companies that survive during times of scarce resources are more efficient.
- Learning from Mistakes. We rarely learn from successes, only from failures. During a recession, things are harder, and there are chances there will be more setbacks. This environment will improve an organization’s problem-solving skills and agility.
- Builds a Tribe with Folklore. Surviving during times of great adversity builds excellent team cohesion. That is why groups have initiation rituals, to bond the members. Those hardships become the folklore of the organization, enabling it to share its culture with newcomers post-recession better.
- Considerable amount of available talent. In recessions, swelling unemployment provides a talent pool is brimming with great potential that one can get for lower prices than during good times.
- Get noticed. During good times, everyone is succeeding, so gaining attention is hard. However, in a recession, marketing and advertising fall, and success stories are rare. Thus it provides a chance to get noticed and get a leadership position.
- People are more interested in “Life-Saving Products.” During good times, selling a product or service that will save a few points of cost, or grow a few points or revenue is not always easy. Margins are good, and management is too distracted to pay attention. However, in a recession, things are tough, and management will look to any lifeline to survive. Thus if you can save costs or boost revenue, customers are more likely to buy.
- Investors Have Shut Up Shop. During a recession, finding VC or institutional capital is hard, so companies must fund expansion from their resources. As a result, they are more focused on generating cash and being resilient, which ensures survival. Those companies that cannot make money in good times, e.g., WeWork, will never survive in a downturn.
- Better able to capture gains when the market returns. Due to the focus on cash generation and resistance, when markets return, these organizations are well suited to achieve the growth and more ahead of others.
- War Time CEOs. As Ben Horowitz points out, at times like this, you are “War Time” CEO. Thus survival is paramount, and you cannot run out of cash. Therefore CEOs will be more thoughtful to avoid costly mistakes, e.g., such as bad hires, pursuing multiple, disparate markets simultaneously, crafting one-sided partnerships to gain media exposure, and making inefficient marketing commitments.
- Everything is on Sale. Not only talent, but everything is on sale. Rents are down, and used equipment is available. The costs of everything are low, enabling higher margins than competitors.
While all the above reasons make logical sense, and there are those companies that launched during recessions that emerge as market leaders, overall do companies that begin during recessions have a higher chance of survival than those that start during regular times?
I don’t know and cannot find research on the matter. However, I am often concerned with being given a single data point and told that it proves a point or trend. A classic example is that anyone can be the next Jeff Bezos, Mark Zuckerberg, or Bill Gates. Yes, anyone can be; however, the probability of someone being like them is incredibly small, probably less than one in a million.
- VC funding continues to hit all-time highs;
- Private Equity buyouts hit all-time highs;
- The availability of gig workers, SaaS products, and Cloud servers should increase the ease of starting companies; and
- over 300 colleges offer entrepreneurship courses
New corporate formation continues to fall and is below its level during the Carter Presidency. While the chart below only goes through 2011, the trends have not improved.
Knowing the profit of your core customers is key to building a growth model. Many companies have identified core customers that are generating a sub-optimal profit and so they cannot realize the profits they seek. Identifying the correct core customer allows you to generate profits and often operate in “Blue Ocean.”
The European Super League collapsed within days of launch due to hubris and the founder forgetting the key parts of their business model, value creation, sales, and value delivery. The collapse might bring a high price.
Many business owners want to sell at the top of the market. However, market timing is tough. Is this the best strategy? Probably not.
Working with many companies looking to grow, I am always surprised how many have not built a financial model that drives growth. I have mentioned before a financial model that drives growth? Here I am basing on Jim Collin's Profit/X, which he laid out in Good to...
As we emerge from COVID, the current employment environment makes me think of a surfing concept: “Being Caught Inside When a Big Set Comes Through.” Basically, the phrase refers to when you paddle like crazy to escape the crash of one wave, only to find that the next wave in the set is even bigger—and you’re exhausted. 2020 was the first wave, leaving us tired and low. But looking forward, there are major challenges looming on the horizon as business picks up in 2021. You are already asking a lot of your employees, who are working flat out and dealing with stress until you are able to hire more. But everyone is looking for employees right now, and hiring and retention for your organization is growing more difficult.
“Why don’t they use common sense?!” You may have said this phrase yourself, or heard it with your managers, when discussing an employee’s actions. However, the frustrated appeal to “common sense” doesn’t actually make any meaningful change in your organization. We all make decisions based on the information we have and the guides we have to use. So if the wrong decisions are being made in your organization, it’s time to examine the tools you give decision-makers.
You can only determine profitability when you know your costs. I’ve discussed before that you should price according to value, not hours. However, you still need to know your costs to understand the minimum pricing and how it is performing. Do you consider each jobs’ profitability when you price new jobs? Do you know what you should be charging to ensure you hit your profit targets? These discussions about a company’s profitability, and what measure drives profit, are critical for your organization.
If you were starting your business today, what would you do differently? This thought-provoking question is a valuable exercise, especially when it brings up the idea of “sunk costs” and how they limit us. A sunk cost is a payment or investment that has already been made. Since it is unrecoverable no matter what, a sunk cost shouldn’t be factored into any future decisions. However, we’re all familiar with the sunk cost fallacy: behavior driven by a past expenditure that isn’t recoupable, regardless of future actions.
Bringing clarity to your organization is a common theme on The Disruption! blog. Defining your business model is a worthwhile exercise for any leadership team. But how do you even begin to bring clarity into your operations? If you’re looking for a place to start, Josh Kaufman’s “Five Parts of Every Business” offers an excellent framework. Kaufman defines five parts of every business model that all flow into the next, breaking it down into Value Creation, Marketing, Sales, Value Delivery, and Finance.