Resilience doesn’t show up on the balance sheet
Resilience — A primer for early stage businesses
In early stage venture capital, we often try to assess the long-term defensibility of a business. Defensibility asks how well a business will perform in the face of the onslaught of competitive threats that it certainly will face as it grows.
It’s tough to put a number on this quality — we get a feel for it by looking at factors like economies of scale, network effects, switching costs, branding, team strength, and more. A business that has high defensibility, we think, will be more durable against future competitive threats.
What about the resilience of a business?
Resilience is the ability of a business to respond swiftly and nimbly to large-scale change in its economic environment. All businesses, especially small businesses, will be subject to the effects of unforeseeable events and crises, now and in the future. Differing from defensibility, which focuses on competitive threats, resilience is the ability to respond to the broad swath of possible changes coming from black swan events.
Nassim Taleb, in his seminal book, The Black Swan, coined the term “black swan event” for those events that carry the trifecta of being rare, having extreme impact, and being unpredictable.
There is unfortunately no good technique or methodology we have that can predict this kind of change. All we can know and rely on is that black swan events do happen — they have happened in the past, one is happening right now, and they will certainly happen in the future too. Whether your business thrives or survives in this one, you can count on going through another in the future.
We have all seen the spike in unemployment claims that looks more like the axis of the graph rather than part of the graph itself. The effects of this crisis are at a scale of which many of us have not experienced in our lifetimes. Here it is once again, for a sobering refresher of where we are today:
Since we can’t predict when these changes will occur, we need to be building our businesses proactively with resilience in mind.
Resiliency in action — The case of Medellin
Urban planners measure the resilience of a city as its ability to respond gracefully to massive change. That change could occur suddenly (coastal flooding, solar flares) or gradually (chronic poverty, underfunded education systems, unchecked crime).
In the 1980s and 1990s, Medellin, Columbia found itself in the heart of a drug war, making it one of the most violent cities in the world and facing extreme levels of poverty. Landslides made it difficult to travel from slums to the city center, creating systemic permeability issues. Medellin was not very resilient at this time — a shock would likely ripple chaotically through this fragile scene.
Sergio Fajardo, mayor of Medellin in the early 2000s, took action. Investments into the city’s resilience included gondolas and literal hillside escalators, which helped to integrate low-income communities. Additional law enforcement resources were implemented to systemically combat crime.
Fast forward to today — Medellin has won awards for its achievements. These accolades are focused on the city’s growing resilience to massive change, now and in the future.
Building a resiliency framework for your business
The largest and most widely referenced urban resiliency program is called 100 Resilient Cities and is funded by the Rockefeller Foundation. In its study of the foundations of resiliency, it found these four pillars:
- Leadership and strategy
- Human health and well-being
- Economy and society
- Infrastructure and environment
Are there parallels here for the resilience of a growing business? Here are some questions you can ask yourself use to assess the resilience of your business:
- In an extreme scenario, how might the needs of your customers change? Could your business strategy be more flexible to be able to address these changing needs?
- Are there open and well-used lines of communication to management and across departments?
- Are your employees in sync with your company’s mission and trained to work both collaboratively and independently?
- Do you have deep ties into your business community, allowing you to seek advice, mentorship, and community resources quickly?
- Is your technology stack written flexibly so that it can be quickly adapted to new market needs?
- Does your distribution strategy and supply chain work when it is shocked? How well can your company lower costs when demand falls and increase production when the market expands?
- What are the least flexible parts of your business? What are the core reasons for this inflexibility and could they be improved?
- How could you invest in your business to become even stronger?
McKinsey & Co recently studied the operations of 1,000 businesses through the 2007 financial crisis. They found that organizations set up to be resilient delivered 150% more growth than their non-resilient counterparts over the decade to follow. The companies implemented different resilience measures, but had in common flexible processes that allowed them to react to changes much more quickly than their counterparts.
This is even more impressive given that the resilient companies were initially hit just as hard as non-resilient companies — the difference is they were able to respond more gracefully. The revenue of the resilient organizations in 2007 dropped by the same portion as their peers, but by 2009 their earnings rose by 10%, versus the 15% decline felt by others.
The group of resilient companies had plans in place that helped them move quickly and respond to market forces in real-time.
What can be done now?
It has become clear that the effects of Covid-19 will have long-lasting effects on the world economy. In the short term we have seen credit markets seize, lenders retreat, and a specter of insolvencies looming. With these effects forecast to evolve for many months and even years to come, only time will tell what the true impact will be.
Startup companies, especially those early in their growth, will feel the effects of this crisis. Your customers might have retreated entirely or tripled overnight, depending on the “ity” distinction between servicing the hospitality industry or the hospital industry. Whatever your unique situation, how you respond now will define your organization for years to come.
Early stage companies have less resources than large organizations, but they can naturally be much more nimble. Use that to your advantage. Absorb up-to-the-minute information of what is happening in your industry and the macro economy around it. Extract key insights and use them to quickly inform your business decisions, changes to your technology stack, distribution strategy, and more.
The last step is to plan ahead for next time. Creating a business continuity plan is a good place to start. Since we can expect more black swan events in the future, we should be mindful of how we can invest in our long-term resilience today. Resilience doesn’t show up on the balance sheet, but it exists and manifests itself uniquely in each business.
“It’s fine to celebrate success, but it is more important to heed the lessons of failure.”
-Bill Gates
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