David Wadhwani | Finding Opportunity in Crisis

Hi everyone. Welcome to Grey Matter, the podcast from Greylock, where we share stories from company builders and business leaders. I'm Heather Mack, head of Editorial at Greylock. As we enter yet another era of economic uncertainty, we're revisiting some of the best advice veteran business leaders have for entrepreneurs. In this case, we're talking about what company leaders can do in times of crisis and to ensure their business can weather the toughest moments and potentially come out stronger. So today we're sharing the audio version of an essay by David Wadhwani, who is the Chief Business Officer of Digital Media at Adobe and a Venture partner at Greylock. David wrote the essay, which outlines his top five crisis navigation strategies in April of 2020, shortly after the COVID 19 pandemic first hit. In this audio version, we've removed some of the COVID specific language. You can read the full version of this essay on the Gray Matter content section of our website@greylock.com blog and you can find a link in the show Notes. And if you aren't already a subscriber to Gray Matter, you can sign up at SoundCloud, Spotify, YouTube, or wherever you get your podcasts. Finding opportunity in what CEOs should do right now by David Wadhwani as my partner Reid Hoffman has said, entrepreneurship is like throwing yourself off a cliff and assembling a plane on the way down. That is hard enough, but what do you do as a startup CEO when you hit unexpected and violent turbulence? The current crisis is causing an unprecedented level of turbulence, likely across every aspect of your personal and professional life. Anxiety, market volatility, and decreased funding and sales opportunities are simply the reality for the foreseeable future. On top of all that, many of you are having to make very tough decisions like layoffs and pay cuts. This is not an easy time for anybody, but a crisis like the one we're in today can also present an occasion for companies to reexamine operational priorities and develop strategies to not only weather the downturn, but to emerge as stronger, more enduring businesses. I've seen firsthand how economic uncertainty can actually help a company recalibrate to become a better version of itself. I was running Adobe's Creative Business unit during a 2008 crisis where I oversaw product engineering and go to market for Adobe's Creative Suite. The Great Recession actually provided an incredible opportunity to take action on longer term strategic initiatives. We used the time to experiment with new business models, rethink how we built and deployed software, and better understand the needs of our most tenuous customer segments. We were able to do this because the downturn exposed weaknesses in our execution and reduced some of the traditional growth strains on our business. These two things gave us the clarity, time and space to focus on things that would have been difficult to justify spending time on in a growing market, and this eventually gave rise to many learnings that helped us transition from Creative Suite to Creative Cloud. I later implemented many of my lessons from 2008 while I was CEO of AppDynamics. As recession fears began to spike again in 2016, I thought some of my learnings may help other growth CEOs navigate the current uncertainty. From my experience, employees need you to play multiple roles and they need you to do it genuinely. They need you to show compassion as you reign in spending, to show empathy if you do layoffs, and to hear you talk about how you understand that each person is making sacrifices big and small during this difficult time. But they also need you to turn the corner at the right moment and lift their focus and attention to the journey ahead. It's not only about making sound business decisions, but about setting the tone for your employees so they can bring their best efforts to the table. Showing that you are consciously adapting to this new environment takes some of the uncertainty and fear out of the everyday experience for them. So in this new reality, what can you do in the short term to ensure you are successful in the long term? I've laid out five strategies that you might find helpful in navigating a crisis. Number 1 Make lifetime value your North Star. 2 Focus on leading indicators. Number 3 Drive recovery focused campaigns. Number 4 Define objectives you can control. Number 5 Inspire your team for the road ahead. But first, remember that cash is king. I'm not going to spend a lot of time discussing the importance of managing your cash flow since there have been tons of articles on surviving the downturn. But suffice it to say, the single most important thing you need to do first is protect your cash position and identify how you extend your Runway. This could mean right sizing your go to market investments, addressing headcount issues or opening a line of credit. This is easily said, but hard to implement since top line forecasts are difficult to get right. My advice is to imagine a few different scenarios and figure out what you would have to do in each situation in order to maintain your cash position. For example, how would you maintain sufficient Runway if your bookings came in at 75% of your plan, 50% of your plan, or 25% of your plan? Every business will have to consider different scenarios, but the exercise should include some extreme downside outcomes. Thinking this way is absolutely essential and helps align your leadership team. And in this environment, the extreme scenarios may become the norm. But the goal here cannot simply be to survive the current economic conditions. Once you and your teams determine how to tighten your belts and weather the storm, it's time to start thinking about actions you can take to get operationally ahead of the business so you can thrive in a post crisis world. Now let's dig into the five things I did at Adobe and AppDynamics and which may help you find opportunity in this crisis. Make lifetime value your North Star there's no question that most businesses will have to make many short term go to market decisions during the downturn. From top of funnel marketing decisions to rules around discount rates to difficult decisions around customer early cancellation requests. This is just the reality of operating in a recessionary climate. Ignoring these pressures could lead to lost business and negatively impact cash flow, but accepting them blindly could negatively impact your longer term prospects. There are ways to balance short term needs with long term desires. Here are some things to consider along the Marketing Optimization Recessions do a great job of eliminating your strongest and weakest customer segments. When it comes to reining in marketing spend, it's critical that you take the time to understand which customer segments are still most likely to buy now. With healthy long term retention rates, the cost of engaging and acquiring those customers should be significantly lower than your weaker segments. From my experience in growth markets, marketing spend as a percentage of conversion is highest on the hard to reach weaker segments. Refocusing marketing efforts on the stronger segments and approaching the weaker segments differently, which I'll go to in a moment, provides you an opportunity to reduce total spend while maintaining your most profitable customer acquisition activities. Sales Discount Rates Great sales organizations find ways to remain aggressively focused on closing deals despite the downturn with an eye on expansion during the recovery. As a result, you'll likely see a rise in exceptional requests for discounts. It's easy to justify these discounts. After all, the gears of the world economy are turning slowly. Unfortunately, you may be giving away long term opportunity by discounting in order to close deals during a recession. As as discounts during a downturn can easily turn into new pricing entitlements in a recovery. To combat this, you should try to structure multi year agreements with steeper year one discounts, ultimately ramping back to street pricing and out years. And if you can't get multi year commitments, consider giving the discount for the agreement's term, but also negotiating and codifying higher renewal pricing in the agreement Customer Support Inquiries A well run company will always call its vendors during a recession to renegotiate existing agreements, so you should anticipate that the volume of these calls will increase the deeper the economic downturn goes and the longer it lasts. It's critical to recognize that this is an opportunity to build trust with your customers by helping them meet their own financial objectives, but also by recognizing that lower spend or early termination are not always the only paths. Consider maintaining contract value, but giving them more entitlements, for example more units or access to higher tiers for some period of time. Doing so may help them get more value out of your product or save money in other places, which helps justify the current spend on your product. It also has the added benefit of setting up for an expansion opportunity as the market recovers. The key thing is to treat all of these inquiries as new sales campaigns with empathy. The current market context is tough and will likely get tougher, but it's also clear that business opportunities are not going away as consumers and businesses reshape the way they engage increasingly online. You should focus your company on your strongest customer segments and encourage flexibility on short term pricing without compromising lifetime value. Additionally, be prepared to engage some existing customers in brand new sales campaigns that balance their short term financial needs with the broader value you can provide. Number two Focus on Leading indicators it's hard to measure and drive a growing company in good times. It's even harder during a slowdown and it's incredibly difficult during an economic shock given the lack of market and consumer visibility. So it's no surprise that one of the biggest issues I faced in 2008 and the thing I see founders struggling with today, is the question of how to measure the business with so much uncertainty in a time like this. Our knee jerk reaction as executives is to start tinkering with employee objectives before we even have good visibility into the new norm, which by the way, may take a couple of months to truly establish themselves. This is often most acute in sales teams where many rush to reset quotas down, so sales teams remain motivated. This can be a complex decision with many unintended consequences. Sales plans can take months to settle, and dropping quotas can fundamentally change the dynamics of those plans. If you set quotas too low, your expenses could grow to a point where you need to preserve cash. Conversely, if they're too high, you'll need to change them again in a few months, at which point you've potentially eroded a culture of accountability. You need to be able to speak to your teams about the market uncertainty and acknowledge the complexity of bonus compensation. But you also need to use this opportunity to remind your team that variable compensation is by definition not an entitlement. It's tied to company performance and comes with a tailwind in good times and headwinds in tough times. Changing this can reset cultural perspectives. I see variable compensation culturally become expected payouts. Instead of dropping quotas or resetting MBOs at a time like this, you should consider layering in shorter term levers like Spiffs, Draws and other methods to make sure employees are compensated fairly in this market without risking your budget or your culture. You should also focus your inspection and any short term incentives on leading indicators. In today's environment, you can't rely on sales pipeline as a leading indicator. You need to focus on activity things like number of new business meetings booked, number of attendees at webinars, number of meetings in an account, et cetera. Good economic climates often erode disciplined go to market execution because even sloppy execution can still lead to great booking when customer demand is high and corporate budgets are flowing. The 2008 downturn forced me to reorient my attention on true leading indicators and gave me a much richer sense of what was working and what wasn't. It ultimately helped justify the massive changes we needed to make at Adobe, which in turn made us a stronger company. Use this downturn to inspect the activities that drive pipeline. Focus your team on the disciplines that truly achieve the outcomes you seek and consider short term incentives for those activities. This will focus everyone from executives to individual contributors on building a business that will emerge stronger and more ready for the growth journey ahead. Number three Drive recovery Focused campaigns. Companies always have short term and long term prospecting opportunities. Growth companies typically focus the vast majority of their time on short term prospects, I.e. those with a propensity to buy within six to 12 months since their total sales capacity is often far less than the immediately available tam. Given the economic shock we're all experiencing now, many companies will see this invert for the first time. The product market fit and value remains clear in the long term, but short term prospects have dwindled as many companies reduce or freeze spending. Failing to reorient your go to market activities to consider this reality will inevitably burn more cash, lead to marketing sales inefficiency, and drive poor outcomes. Go to market leaders should consider rebalancing the mindshare toward the larger base of long term prospects. Short term prospects are still out there, you just have to find them. There are plenty of reports identifying which companies continue to hire and spend and those that have implemented hiring freezes or layoffs. Marrying this data with your historical segmentation for highest propensity in industries or company profiles can give you a narrower prospecting list to focus on. Consider rotating your marketing campaigns to these companies and consider reviewing sales territories and account assignments to ensure reps are focusing their attention on likely prospects. Focusing on these actions can help drive efficiency and free up some cycles for the growing class of long term prospects. We all keep hearing that the current situation is unprecedented. This couldn't be more true both as it relates to the challenges we face and as it relates to the global financial response by governments around the world. While it's impossible to predict when a recovery will begin, we clearly see signals that governments will act aggressively to fuel it once it happens. And I believe there are relatively cost effective ways to ensure you're at the front of the line when your traditional buyers start spending again. How you approach these prospects today and can make the difference between in line growth and outsized growth when the recovery eventually begins I urge that some portion of your go to market plan should be oriented to creative recovery focused campaigns. Recovery focused campaigns tend to be focused on individuals rather than companies and on relationships rather than product value. They're grounded in empathy rather than traditional metrics. The objective of a recovery focused campaign is to build strong champions within companies that you believe will convert to customers as the market recovers. Consider offering services that further the careers of these future buyers. You can do this by hosting webinars with practitioner level advice on personal career management and support it with content on leading operational transformations as the economy recovers. Also consider providing access to online learning material and a free trial to your product. The objective is to engage individuals, provide personal value and turn them into champions before the recovery begins. Everyone you engage will ultimately fuel your top of funnel during the recovery, at which point you run your traditional campaigns to nurture them into paying customers with a focus on short term bookings. Number four Define objectives you can control In a strong economic climate you might be landing thousands of customers and just dealing with making sure they can all onboard successfully. Wouldn't that be nice? But in a compromised climate, you'll be onboarding supporting fewer customers. This frees up capacity throughout the company and not just your customer success teams. Use this opportunity to give your team space to address issues that were organically building up while you were growing rapidly before the market correction. For example, your engineers may have a little more time to pay down tech debt or re architect parts of their platform. They've always wanted to address for years. Your go to market teams may be able to use the time to run a backlog of experiments. Your ops teams might want to use the opportunity to rethink your internal data pipelines to provide better business insight in real time. Think of it as company stress cleaning. This provides teams a sense of control, it helps them identify a silver lining in an otherwise difficult time and it will build a better foundation for long term growth when markets reopen. Inspire your team for the road ahead. Downturns have a way of reorienting people to family and community. Now is a good time to evaluate the ways your company can strengthen connections and purposes both within teams and society as a whole. This is not about doing a lot of little things. Find a small number of measurable things that are natural for your company, your geography and your culture, and make them corporate initiatives. Look for things that your products and teams can support, causes that matter and inspire you and your employees. But whatever you do here, do it genuinely and do it strategically. At Adobe, I used the opportunity to share some personal experiences that led me to the conclusion that we needed to rethink our entire go to market strategy so we could reach more people. I made the case that creativity was an essential part of leading a fully realized life and that our products and business model needed to support that social need. Find a narrative that works for your company and take the time to carefully shape it. This will help sustain and motivate your teams and you during these uncertain times. Crises are never welcome, and it's often difficult to see the light at the end of the tunnel. But this current crisis, like all others before it, will eventually end. As we've learned from multiple economic downturns, many businesses will struggle or fail. Yet we also know that each crisis has reduced some of the most enduring companies today. Which category you fall under in the future depends on how you act now. That concludes this episode of Gray Matter. As a reminder, you can read the full version of this essay on the Gray Matter Content section of our website@greylock.com blog and you can find a link in the Show Notes. And if you aren't already a subscriber to Gray Matter, you can sign up at SoundCloud, Spotify, YouTube, wherever you get your podcasts. I'm Heather Mack. Thanks for listening to Gray Matter.