What should a business leader, especially a startup CEO, do to survive a downturn.
Ray Zinn, the longest serving CEO in Silicon Valley, has survived many of them and shares his knowledge in this first in our “Three Tough Things You Need To Do” series.
Guy Smith: Hello everyone and welcome to another episode of the Tough Things First podcast and this is a special event today. This is the first in a series of periodic podcasts that we’re going to do on the three tough things that you need to do in order to have a healthy business. We’re going to pick a different topic every time, but we’re going to pick on Ray Zinn’s wisdom on really the critical elements that an entrepreneur or a business leader needs to face, needs to stare down, needs to take control of in order to make sure that they will succeed in business. Before we go, jumping into the topic today, which is the three tough things that you need to do to help your business survive in a downturn, we’ll bring on Ray Zinn. Hello Ray, how are you today?
Ray Zinn: Doing great, Guy. Thanks for doing this podcast with me.
Guy Smith: Oh, I love doing these podcasts. I learned so much from you per unit time that it’s like drinking from a fire hose. I feel like I’m getting one of the best educations in my life whenever I do a podcast with you.
Ray Zinn: Well, thank you.
Guy Smith: So let’s dive in because right now when we’re recording this, it’s early 2020. There’s no recession probably going to happen this year, but maybe next year. That means there’s going to be an economic downturn and there’s probably a lot of entrepreneurs in your audience who are already kind of anticipating that, but they may not be sure about what to do in a big downturn. So why don’t we start off. Why don’t you give me the first thing that a business leader needs to do in order to be prepared? The one tough thing that maybe they don’t want to do but they got to do in order to make sure that they survive a downturn.
Ray Zinn: Well, there’s two issues that we need to back up a bit here, Guy, because there’s two kinds of downturns. One, a downturn is a reduction in revenue and so it could happen as a startup. In other words, you could not have any revenue and that’s a downturn in that sense of the word, because all startups start at the bottom as they say, or you could be having an ongoing running business and then you hit some kind of snag and the business falls off and then how do you deal with that? So there’s two kinds of, as I say, two kinds of downturns and both are important. Yesterday, I met with a couple of guys who, or actually three guys, who were a nine-year old startup. So can you imagine how you call yourself a startup after nine years? But they’d already gone through $16 million and had no revenue.
So they were talking to me about what I like to invest in their business and I said, “No.” They said, “Well, why not?” I said, “Are you kidding me?” You’ve been at this for nine years and you still are … no revenue. That is a serious issue, I think, for a startup is not to have some kind of recovery plan or at least a, “How do I stop the bleeding?” I learned that they had nine people in their company, if you want to call it a company, and they were all drawing $110,000 a year.
So I said, “There’s your first mistake is that I guarantee you, if he had not taken any salary, I guarantee you’d start having revenue in a short period of time.” So most startups, and for that matter, I think all startups, should the executives anyway or the owners of the company should take no salary for at least two years because that gets you hungry. That gets you really wanting to do something, to change direction rather than continue raising money and bleeding so badly. So let’s go to the company that’s moving along at some clip and they’re having revenues and then all of a sudden some glitch happens and they suffer a significant revenue drop. Well, now’s the time to look at cutting back. Maybe you go, at least the top executives, go without a salary for a few years or until the business recovers.
Ray Zinn: So that shows intent. That shows, number one, you’re motivated to fix the problem and number two, it’ll help stem the bleeding because you won’t have that cost of those salaries. In both cases, it requires some pinching of pennies and some holding back on your expenses. So that’s the first place to start is to really cut your spending down to the point where the company minimizes the bleeding.
Guy Smith: That’s always a tough decision for a business leader to make because even during downturns, you want to invest in your people, you want to invest a little bit in R and D and whatnot. So figuring out where to cut when the revenues start to dry up is a tough thing. Speaking of that, you mentioned the two different types of downturns. Just today, I was reading this news story. We all know about Boeing and the 737 Max debacle. One of their suppliers, a full 50% of their revenues were dependent on the 737 Max, not on Boeing, but on that particular aircraft. So they are in a world of hurt because not only did they fail to plan a very diversified revenue stream, but there’s no end in sight to this particular disaster. They don’t know when they’re going to get their nose back above water.
Ray Zinn: Well, you don’t have to say anything that we talked about like in a startup when you don’t have any revenue. So if you have a company that is dependent on just a few customers, at least in the example you gave where you have this one supplier, 50% of your revenue comes from this particular aircraft. It’s like sliding in a banister and it turning into a razor blade. You know what I mean? You’re going to suffer some damage. So I remember on two different occasions that during my tenure at Micrel that we lost customers that represent over fourth of our revenue and that worried me. I said, “Never again will I have a customer with more than 20% of my revenue.” Now, you can see that in the case of this company that you’re referring to make them those Boeing parts for the 737 Max, that’s half the revenue. I just would never let that happen. Even 25% was a killer. So I set the bar at 20%.
No customer that we had, and we had thousands of customers, no customer would represent more than 20% of our revenue. So you can set some guidelines like that because I guarantee you, you will have hiccups. You will have situations come up where you’re going to suffer a revenue loss. Your goal as the CEO or leader of the company is to protect your company, protect your employees. You can’t do that if you’re hanging out there with customers that represent more than 20% of your revenue because you may be able to recover from 20%, but you’re not going to recover from 50%. So I don’t know how that company that you’re referring to is going to survive.
Guy Smith: That’s a tough call because right now between what the decisions Boeing is making and the FAA is making, blah, blah, blah, blah, blah, there’s really no visibility into how long they have to tread water. If half of your revenue is gone, that’s a lot of treading. You got to have your water wings on in any chance to survive that. So I remember reading in Tough Things First, and I think the way that you phrased this is that you had to always plan as though there’s going to be a downturn tomorrow, but that affects your employees if you have that mentality. So you plan your businesses as if there’s never going to be a downturn, but also you run your businesses if it’s going to happen tomorrow. So talk to me a little bit about that. How do you play that balancing act between being in disaster planning mode but yet, longterm optimism?
Ray Zinn: Well, you keep our costs down. As you said, you plan your business as though there was no downturn. In fact if you look at most company forecasts, they never forecast a downturn. They always say every year is going to be a multiple of the next year. What kind of growth? Five, 10, 50 whatever percent and they show that the revenues are always up and to the right. Well that’s not realistic, but that’s the way you plan it. You plan it as though there is no downturn ever going to come and that’s why your revenues in your three to five-year plan shows up and to the right, revenue’s going to grow. But if you look at the history of most companies, in fact, I’m not sure I even know of a company that ever hit the revenue plan that didn’t have some downturn and the [inaudible 00:10:35] they went back and looked in the rear view mirror.
They did have quarters and months or years where they suffered no gain, maybe a flat to down. So what you do is, even though you’re planning not to have a downturn, you run your company as lean and mean as you can because it’s always harder to cut back than it is to grow. You don’t want to have the situation where you’ve got to cut back too hard. So make sure your expenses are minimal. In other words, you keep your expenses down. Now you say, “Well, but then what if you’re growing like crazy?” Well, if you’re growing like crazy, be careful how fast you’re growing.
You want to make sure it’s controllable and controllable meaning that you have some kind of logic in the way that you grow your business. So you can actually grow too fast. As they say, the bigger they are, the harder they fall. So watch your expenses, keep your salaries down. I know if you’re in a competitive area like in the Bay Area and Silicon Valley where a lot of competition for employees, salaries tend to ratchet up very quickly. But so do downturns that happen very quickly. Make sure you don’t get carried away with your expenses.
Make sure your expenses are well in line. That’s why run a profitable company. Have your profits within reason. Don’t run so close to the line that you have no room for cushion. I always make sure that I have at least six months or more of cash so that’ll carry me through a downturn. Because if you don’t have cash, you die. It’s like if your heart isn’t pumping blood, you’re going to die. So make sure you have the cash to sustain yourself and also make sure you’re able to suffer a downturn without too much collateral damage.
Guy Smith: Well, and if I remember correctly from reading Tough Things First, you had, in the book, said that you need to have six months operating cash in the event that revenues fell in half. That kind of gets us back to this Boeing story that we were just talking about because they literally had their revenues chopped in half and they immediately had to go to layoffs and other cost-cutting measures because they didn’t have even six months of operating revenue in the bank.
Ray Zinn: You mean cash. You meant cash.
Guy Smith: Cash, yeah. So I think in terms of a downturn, six months almost seems like forever. But in a serious downturn like we had in the great recession starting in 2008, a lot of small companies especially, did see their revenues cut that severely.
Ray Zinn: The Boeing debacle as is going on a year now. So I think, was it May of last year and so … or maybe it was April. Anyway, so we’re going on to a year. So in that case, if your company has half your revenue committed to that particular project and you have six months worth of cash to sustain you, you’re already dead before you begin, because six months if you’re thinking, “Oh well, the FAA is going to improve the modifications to the aircraft and they’re going to get back up and running,” hope springs eternal.
But you still got a plan for a worst case scenario. If you know, for example, that you have a customer that represents 50% of your revenue, you got to get on that right now. In other words, you got to find some way to minimize that concentration and then also make sure that you plan for a more prolonged debacle, like in the case of this 737 Max.
Guy Smith: I think that’s important because part of the news story that came out about Boeing this morning was that their leadership announced that they think it’s going to be several quarters, at least three quarters of the year before they get back into production. So that means it’s going to sneak up on a two-year long crisis.
Ray Zinn: Well, a few quarters is three. Several quarters is five or seven. So if you’re saying three, that’s a few, but several is five to seven and that’s a long time. So you’re sounding like more like over two years.
Guy Smith: It could be. For all their suppliers, that means a lot of hard times and the hard times affect the employees. So here’s kind of a followup question. Do the rational frugality planning for the downturn, having cash on hand when the downturn comes, how do you work with your employees? They’ve got to be nervous. They’ve got to be anticipating dread and worry and worry and, “Whoa.” How do you deal with that issue?
Ray Zinn: Well, again, if your employees know and you keep them informed as to what’s going on, then they get themselves prepared too. In other words, you preach as you would, using that term preach, to your employees to live frugal lives so that when downturns happen that they can also keep their head above water. You have classes, you have meetings and you talk to your people about being frugal themselves so that they can withstand a downturn because as they say, crap runs downhill, not uphill. So they have to be prepared for the difficult times also. That’s the important thing about having an ongoing relationship with your people. What I found was that if I, as a CEO of the company, took three times a hit that the least employee took, then they tend to accept that.
In other words, if I say, “Okay, we’re going to have a 5% cut back,” then I would take a 15%, personally. If we’re going to have to take time off one week, I’d take three weeks to a month off. Not that I would take it off, not attend work. What I meant was that I would not take a salary for that period of time. You can do all sorts of things as long as your people are behind you and they realize you’re sharing the pain, not just one time, but two to three times with what the average employee is suffering.
Guy Smith: Part of what I think I heard in there is that this upfront communication, being transparent with the employees is critical to making those next steps happen.
Ray Zinn: Absolutely. You lay out a worst case scenario for them. Tell them what the company’s going to do that, “Okay, we have this one customer that represents 50% of our revenue. We’re going to go out and we’re going to find other customers. We’re going to spread the risk, and in the meantime, we’re going to have to cut back because we’re going to have half as much to do because the production line’s been shut off on our particular product.” So people, they understand. They read the papers. They know what’s going on. So as long as you’re upfront with them and you’re transparent, they’re willing to stick with you.
So, especially if you have a good company where the people feel honored and respected, they’re going to stay with you even during bad times. So when I lost, as I said, these two customers at different times, but the last two customers that represented over half or a fourth of my business, my competitors, they didn’t suffer the same thing because they didn’t lose the same two customers. As you pointed out in the Boeing situation, the rest of the economy is doing great, but Boeing’s having a problem with this particular aircraft. So the economy may be going gangbusters and you might suffer a loss because of a situation like Boeing and your employees say, “Well, I can move down the street and not have to take time off or not have to take that salary deduction.” But if they know you’re being honest with them and if you’re willing to preach this concept of them living frugally and you being a loyal and an honest company, then they’ll stay with you. They won’t jump ship.
Guy Smith: Well, and I think this is a critical lesson for some of the founders and the green CEO’s out there because I’ve worked for startups and there’s this almost manic desire among some founders to be perpetually optimistic and to express nothing but optimism to their employees. When something bad does happen, the employees instantly feel betrayed. There is then, no motivation internally in the company whatsoever, to try to be successful going forward. So I think a lot of founders in Silicon Valley need to learn this lesson. It’s better to tell your team the truth and everything that’s important to everyone making good decisions in the company and in their personal lives, because if you play it the other way, you can have a marching Congo line going out the door as your employees decide that they can’t trust you anymore.
Ray Zinn: Well, in the case of this company I met with yesterday, they were so optimistic and they believed that this thing was going to take off like gangbusters any second is why they kept spending money, spending money, spending money because they were kidding themselves. They weren’t just kidding their employees, they were kidding themselves. So trust me, be honest and upfront with your people and you’ll retain them.
Guy Smith: And the other rule, never believe your own hype. If you’re perpetually optimistic when you’ve been losing money for nine years, then you’re deluding yourself.
Ray Zinn: As they say, nothing is as good as it really is.
Guy Smith: That’s true. Now before we recap, I want your audience know that we’ve touched upon a couple of the lessons in your book Tough Things First, which is now becoming required reading on some college campuses in their entrepreneurship programs. To your audience out there, if you’ve not read Tough Things First yet, you’re cheating yourself. This is arguably one of the best business and leadership manifestos that’s out there. Clearly written, entertaining on top of everything else, but in terms of raw business lessons, it’s harder to find a better resource on which to set your own business foundation going forward.
Ray Zinn: In fact, this company that I met with yesterday, one of the people said, “I’ve heard of this book, Tough Things First, and based on what the reviews and what I’ve read, I think if we had read this book before we got so deeply involved in our startup, that I think we would have avoided a lot of the problems that we’re currently facing.” He actually said that yesterday.
Guy Smith: Well, and that gets to the whole issue of mentorship. I’m going to brag about Ray for a second. I know one of his side projects is called Zinn Starter. He’s giving money to student entrepreneurs and a few colleges so that they can get a leg up, kind of get past that concept phase, get to the point where they’re business-ready. But part of his program is all about mentorship. In other words, get perspective and the insight and a little bit of direction from people who have been in the trenches, who know how not to stub their toes. That’s really what Tough Things First is for a lot of Silicon Valley entrepreneurs is the book that is going to teach them how not to make the big old classical mistakes that have killed so many businesses in Silicon Valley.
Ray Zinn: Well, thank you, Guy. When we wrote the book, I asked, “How do we title this thing?” They said pretty simply, “We need to do the tough things first.” So to survive, to be successful, you need to do the tough things first because those are the things that we tend to ignore or procrastinate are the tough things. So if you just deal with the tough things up front, get them out of the way, you will survive. That’s what the book talks about and educates on how to do that.
Guy Smith: Right. So to recap today, we were talking about what are the three tough things that you need to do in order for your business to survive a downturn. In my scribbled notes here, these were the three that I took away. First, you plan your business as though a downturn was never going to happen, but you’ve run your business as though the downturn were coming tomorrow. That was number one.
Number two was have enough cash on hand to survive six months if your revenues fall in half, and for small companies, depending on a small number of customers, that’s doubly important. Then the third one that I took away from this is always be upfront and transparent with your employees at all times because they can handle the bad news, but they can’t handle being misled.
Ray Zinn: Or no news.
Guy Smith: Or no news, yeah and no news is not good news when it comes to business. Well, thank you, Ray. This has been delightful. I hope for your audience, it’s been educational and again, if you have not read Tough Things First, you’re cheating yourself. Go to Amazon right now. Get yourself a copy and for a little bit lighter reading, I’m also going to recommend Ray’s other book Zen of Zinn. This is a very different book. It’s little sound bites. You can read just a dozen of them a day to get both emotional inspiration, but business guidance as well, and understand how all these different factors, business, community, country, economy, how they all interplay. That makes running your business tremendously easier because when you see how the cogs spend together, they will continue to spend together. So thanks, Ray. I appreciate your time and I’m looking forward to the next opportunity to do a podcast with you.
Ray Zinn: Well thanks, Guy. I look forward to it myself.