What Entrepreneurs Should Ask Themselves When an Economic Crisis Hits

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After the stock market’s rocky ride in recent months, some analysts are wondering whether a new economic crisis might be around the corner. Judging by the economy’s overall performance, there is no need for immediate concern. But for entrepreneurs who prefer to be safe than sorry, the question remains: what should you do when the next crisis hits?

The answer is different for entrepreneurs and start-up employees than for investors. For most investors, the options are straightforward: sell shares to limit financial losses, hold shares and hope everything will blow over, or buy shares if there’s a belief the market has bottomed out. Either way, the gains and losses are mostly financial, and while the right choice may be hard to determine, the options are clear.

For entrepreneurs and employees, however, it’s not that simple. Imagine having put not only your money into a project, but also your sweat, tears, and time. When you’ve invested some of the best years of your life in a company, changes in the macroeconomic environment can be particularly tricky to navigate. You’re forced to consider not just what choice offers the best financial outcome, but also the best result in terms of your — and often your family’s — wellbeing.

When the next crisis does hit, I’d argue entrepreneurs and startup employees should ask themselves three crucial questions, to help decide whether continuing to work on your company is worth your while.

  • First, how much personal effort are you still willing to make, after accepting that your previous efforts amounted to little? After all, when a crisis hits, the time you have put into your company and many of the results obtained will be wiped out, and it would take considerable additional effort to even return to square one.
  • Second, what access to cash do you have left, and how willing are you to gamble with it? Here also, a crisis would make it necessary to relabel a lot of previous financial investments as sunk costs, while future investments and their returns should get re-assessed based on new, less favorable market realities.
  • And third, what is the proven viability of your company’s business model? If a company was profitable before the crisis hit, it is reasonable to assume it can be so again. But if there had never been any hint of profitability or even revenues, it might seem naïve to assume it would yield returns now.

Assessing these factors can help entrepreneurs and startup employees come to the right conclusions faster. Foresight is better than hindsight, after all.

Several individuals I spoke to for my book, Before I Was CEO, provide a helpful guide. I interviewed them about one of the last big crises for startups: the dot-com crash of 2000-2001. As the book’s title suggests, the people I talked to ended up becoming CEOs of successful companies: one became chief executive of a publicly-listed company, Infosys; another of a large private company, The Weather Company; and a third of a successful startup, Plumbee.

But when they went through the rollercoaster that was the dot-com crash, their then-companies’ future was uncertain, and so was their personal outlook.

Senapathy “Kris” Gopalakrishnan, a co-founder of the India-based Infosys, saw his company’s market value on NASDAQ drop 90% from 2000 to 2001. David Kenny, then CEO of Digitas, a U.S.-based online advertising agency, went from multi-millionnaire-on-paper in March of 2000 (his company was one of the last to go public), to struggling to keep the company afloat only a few weeks later. And Raf Keustermans, then CEO of CyGaNet, a European online community tools and services startup, hadn’t even been able to properly scale his company when the crash started in the U.S.

All of them decided to put up a fight and face the crisis head on. With the above questions in mind, it’s possible to assess why.

First, consider the question on the willingness to continue one’s own efforts. For Raf, even with a company that had a lot to prove (his was a local start-up) and a lot to lose (his angel investors’ money), he felt it was worth it for him personally double down on his company. He had quit college, and his only other work experience was junior marketer in an ad agency. Making his personal exit options limited. But, still only in his early twenties, he had plenty of energy left to make his first venture a success. The time he had so far spent on CyGaNet was time others had spent in college auditoria and bars, so in a way he was still at the start of his career.. He decided to continue the struggle and make the best out of it.

It was hard, and he and his partner could only just about keep their heads above water financially. But through “a lot of hard work, creativity, and a portion of luck” they managed they get without too much damage, he said. In the end, they managed to sell the company, and return money to the shareholders. “We didn’t have the success we hoped for,” Raf told me recently, “but perhaps that was the basis for greater successes later on. We learned that the going was tough, and that there are external factors you cannot control.”

Other founders and early employees may not be as willing to continue spending personal efforts and time. It’s good when we learn from failure, but it can really be sad to fail and get stuck. The years of your life you have spent on a project, unlike the capital invested, are always a sunk cost: while money can come back, your youth and most productive years won’t. So once your financial losses are clear, the only thing left to save from a company’s bankruptcy may be your own time. It’s worth considering that when you decide to stay and put up a fight for your startup, or let it go.

Second, consider the question how much cash is left in your company or can be raised, and how financially secure you are at home. If you do have access to more cash, how willing you are to throw it into what could be a bottomless pit? That was a question David Kenny had to address with Digitas. And to up the ante, the stakes in his personal life were even higher. In his mid-thirties, he had two young children at home, making every week, day, and hour missed at home count. If he was going to miss out on that, he had better make it worth it. Fortunately, however, his wife had independently earned enough money in her job that they didn’t have to worry about not being able to feed their family. On top of that, Digitas, where he was CEO, had just raised $223 million through its IPO in March of 2000, valuing the company at $1.4 billion. In other words, Kenny had a strong financial basis both at home and in the company, and so felt up to the task of trying and keep Digitas afloat.

That was possible, because the money Digitas had raised just before the crisis was still in the company’s bank account. It was firepower that could be put to use. The financial structure of a company isn’t always that solid. If your company has burnt through the cash generated from early investors, and revenues dry up because of a crisis, it may be better to call it a day. Bringing in more money through debt or equity – or worse, from your own pocket – may be like throwing it in a bottomless pit. In that case, it may be better to call it quits sooner rather than later, and mentally write off any shares or options you held.

Kenny however did believe in the fundamental idea of Digitas, which was that digital advertising was the future. If he could weather the storm, he figured, his company might be one of the last ones standing and win market share in an otherwise thinned-out market. And besides, he had a lot of personal upside: the stock options he had negotiated on his arrival were somewhere between 5-10% of the total. If he could turn around the company, he would be a multi-millionaire.

He thus embarked on an arduous journey, working days and nights, cutting costs wherever he could, and all the while trying to keep revenues flowing in. It left him with some scars – he had to fire many colleagues and miss a lot of family time – but it ultimately paid off financially. Digitas took years to recover to its pre-crisis levels, but it did survive and thrive. In 2006, CEO Kenny sold the company to Publicis for $1.3 billion, $100 million shy of its IPO valuation. Kenny himself had already sold 1.5 million shares in 2005, and had another 7 million left in 2006, securing another $20 million on the day of the sale.

Finally, consider the question of your business model. Even if you do have time and money left, it may still be better to call it quits if your business model hasn’t proven itself. Conversely, if you do have a viable business model, rest assured the sacrifices you’re about to make will likely be worthwhile.

Kris Gopalakrishnan is a case in point. The danger of the crisis was never really that his Infosys could go out of business. His challenge was to preserve what he built, perhaps more so on a personal level than financially so. Infosys, known by many as an Indian IT outsourcing company, had been in business for almost 20 years when the stock market crashed in 2000-2001. It had been profitable since many years. But Infosys shares, which were listed on NASDAQ, lost about 90 % of their value during that time, and the business was hurt.

Kris and his fellow founders could by now easily trade their shares, and choose a bird in the hand over two in the bush. Similarly, having spent almost two decades working for the firm, they could decide to hand over the executive reigns. They had options. But they had gone through enough ebbs and flows to know their company was on solid ground. And as lifelong friends and partners, they would also throw away what had been a rich social life, as well as a professional partnership, if they walked away now.

Why would they do that? It had taken the company and its eight founders almost eight years to get to their first $1 million dollars in revenue. In those early years, they practically lived together in the small office they had. “The first 10 years was about survival,” he told me. “It was about making enough money to get around, to grow slowly.” It took them another few years (until 1993) before they went public. But since then, and until 1999, the stock price had multiplied 85 times. The 90% drop was thus relative. By now, these men were certain their business model was viable, and they were willing to sit the crisis out. They also stayed on in their respective executive positions, thus keeping their partnership alive.

It worked. The rise of Infosys after the crisis was much more spaced out than that in the years prior – 10 years to be exact. But over the course of that decade, the company did recover to 85% of its dotcom bubble high. Of the eight founders, four also became CEO after the crisis, including Gopalakrishnan. It provided them with the pinnacle of each of their careers, and a continuation of their lifelong partnership. The lesson is that when a business model is proven, a stock market crash shouldn’t necessarily lead to major strategic revisions or to drastic revisions of the executive team. In at least some cases, if you keep the compass steady, at some point the situation will normalize.

That realization won’t soothe individual employees or founders in the midst of a storm, and it isn’t guaranteed unless certain conditions are met. But is important to ask yourself whether the slumps and crises are worth it for you personally, and for the individual company you work for. When the next financial crisis hits, figure out why you’d go on, or whether it’s best to limit your losses – personally as well as financially. Because while you can’t erase your past you always have the decisive hand in your future.

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