Welcome to Spencer Trask Perspectives, a monthly interview series with our CEO Bill Clifford and writer John Essick. Mr. Clifford has generously agreed to share his unique insights and expert opinions on topics such as business development, deal flow, C-suite management, startup culture, entrepreneurialism, and more.
We welcome your feedback, and encourage you to submit questions to askST@spencertraskco.com for Mr. Clifford to answer in future articles.
No one really knows what to expect the business environment to look like after the world emerges from the COVID-19 virus outbreak. This is especially true for new companies looking for funding, or startups navigating their place within an uncertain marketplace. The US Small Business Administration, for instance, is offering online resources to help guide small business owners through these precarious times and help them to build plans for future events, along with providing tips on how to adapt to our new normal post COVID-19. For larger corporations, McKinsey & Company is recommending companies look at a five-stage process on how to adapt to unforeseeable disruptive events in the future. All businesses, large and small, are feeling the effects of this virus, and entrepreneurs and executives are now left wondering what to expect when people can finally get back to work.
Bill, I would like to hear your thoughts on how you think the landscape for startups will be altered as a result of the events of the past year.
John Essick: How do you think the realities of a remote workforce caused by the COVID-19 outbreak will result in lasting impacts on startup organizations?
Bill Clifford: The concept of a remote workforce is neither new, nor is it something that startup companies and early stage companies have not used frequently in the past as an attractive recruiting tool as well as a mechanism to reduce the direct fixed cost of rent and overhead. While it does not lend itself to all forms of industries and businesses, for many technology-development companies, such as software development, web development, etc., a remote workforce can make sense and become very cost effective IF it is managed correctly. What this recent COVID-19 pandemic has done is force many CEOs/entrepreneurs to quickly become managers of a remote workforce; forced to implement remote management communications tools like Zoom or Skype; forced to institute a cadence of management meetings via telecommunications; forced to implement project management reporting with greater visibility and discipline than previously done (see my previous Spencer Trask Perspectives article on Short Interval Scheduling). In short, many of those CEOs/entrepreneurs who may in the past have been hesitant to fully exploit all of the cost and recruiting benefits of managing a company with a combination of an in-house plus a remote workforce will exit this pandemic more confident than ever to transform their companies into a remote workforce company and fully realize all of the cost and productivity benefits that can accrue from that transition.
The converse of this same experience is being felt on the workforce side of the equation. Many employees who had always hoped and wished that they could work in an environment that allowed work-at-home conditions now find themselves in exactly the environments that they had wished for — and some find it to be Utopia, while others are finding it to be a working nightmare! Those who love it likely have adapted to working when their own personal productivity cycles are at their peaks, some during the early hours of the day, some at night, others in fits and spurts when cycles of mental energy seem to burst forth from their individual productivity. Others find that they simply do not have the personal discipline to focus unless they are in an environment where others are also focusing on the same or similar goals and objectives — they need to draw upon other people’s energies and enthusiasm to get themselves motivated. Left to themselves at home, they lose focus quickly and are easily distracted by anything except the work at hand. This COVID-19 pandemic will become an enlightening experience to both them and to their management as they realize that for some groups of people, productivity cannot be maintained uniformly across all groups of people.
JE: It has become clear that many industries, from automotive to pharmaceuticals, rely extensively on global supply chains. Will VC firms insist on startups having tighter control over their supply chains and contingency plans for high risk issues?
BC: The entire issue of supply chains has zoomed into focus as a result of the current pandemic crisis, particularly as it affects our access to pharmaceuticals and antibiotics. The Venture Capital community is, of course, very tuned in to any issue which will present an obstacle to a portfolio company’s path to market or ability to fully exploit that market at a known and quantifiable cost. They do not want to finance a company that has a cost of goods projected to be X on day one, only to find that a key component in the supply chain is controlled by a hostile player, whether it be a rare mineral or a critical chemical, etc., which once cost Y, now costs 100 times Y, therefore blowing your economics out of the water. Or worse, your hostile player is no longer selling your key ingredient to you at all despite your iron clad contracts. Reliance on components that are outside of your direct control or outside of the control of organizations and entities that are known to be trustworthy players of known repute, who play by rules and laws that are enforceable with penalties, will give the venture investor some comfort. The further the company is from direct control over all of its intellectual property and assets, the more diligence the venture community will exercise in determining whether or not the supply chain risk warrants the investment.
While it is unusual for a startup or early stage company to have a great deal of complexity associated with its supply chains, there are occasions where a new company can be a fabricator or final stage assembler of a finished good that uses parts or components in a novel way, such that they are a ‘newco’ with a long list of suppliers. In these cases, a thorough examination of the supply chain would be warranted, and any VC investment would hinge on getting a clean bill of health in the post COVID-19 world. Mid-sized companies and larger that currently exist are now faced with a dilemma — their BODs and shareholders are asking the same questions that the venture capital investors are asking startups. “How clean is your supply chain? Do you have Chinese suppliers who may withhold critical materials and components? Are you assured of a steady and reliable supply of materials? Are your suppliers dependent upon potentially hostile suppliers who can threaten your supply of critical materials or components? Do you have alternative sources of supply? Do you have control over the costs of these materials and components?” These organizations are now all scurrying to answer these questions and many are finding that, not only do they not know the answers but determining the answers to these questions is a long and complex journey into the bowels of their suppliers’ own supply chains. They may not be readily able to answer the questions posed by their shareholders for some time without extensive research and lots of pressure and cooperation from their own suppliers!
Spencer Trask & Co. co-founded a company called, Trensant, which had patented a number of software algorithms that literally made order out of chaos. This technology was acquired by a software company called, Interos, Inc. and is being used today by the US Air Force and numerous other companies to analyze their supply chains in order to document and identify potential weaknesses and exposures to things like potentially hostile players. These kinds of software tools are going to be needed everywhere to give investors and shareholders the confidence they need that their companies are not at risk from future supply chain upheaval in the post-COVID-19 world.
JE: Do think that there be will a situation for startups similar to what occurred after the dot-com bubble burst in the early 2000s when investor wells dried up for several years?
BC: No, I do not see any similarities between the dot-com bubble bursting and the COVID-19 phenomenon in terms of the investor community’s interest in funding new and exciting startup opportunities. The Venture Capital industry is rich with investment capital and is anxiously awaiting the green light to begin meeting with entrepreneurs and early stage companies in need of cash infusions to get to the next step in fulfilling their visions. There have even been a few IPOs during the pandemic shutdown! Things may have moved a little more slowly due to the difficulties in communications, etc. but there is plenty of “dry powder” seeking new opportunities and I’m sure you will see an explosion of venture placements as soon as the veil is lifted. Healthcare related offerings are naturally at the top of the list, but your normal list of venture targets will get plenty of attention. We are likely to see plenty of action in the remote workplace management industry.
JE: Do you think new business models will emerge with a focus on helping companies with risk management? How can investors/shareholders invest with confidence when supply chain risks exist that companies do not know about, cannot quantify, and have not been revealed to shareholders/investors?
BC: As I mentioned above, this entire topic of risk management, especially as it pertains to supply chain risk, has now gotten the focus and attention that it deserves. While once more typically within the purview of the military because of the sensitivity of the military to owning and operating multi-billion dollar aircraft and vessels with sophisticated communications and munitions equipment with literally thousands upon thousands of components sourced from suppliers around the world, private industry has become equally as sensitive to their supply chain reliance on suppliers over which they have little or no control and who may fall into the category of potentially “bad actors” on the international stage. While these potential bad actors may not have exercised any negative behavior to date, these companies are beginning to realize that they don’t even know where within their supply chains these companies exist and the degree to which they are exposed. Chasing a supply chain is a complicated affair made more difficult by the fact that you don’t know where your secondary suppliers are getting their components and materials — they could also be compromised by “bad actors.” Companies that can assist you with the burdensome task of chasing your supply chain to their logical end will emerge and become hot items in the new, post-COVID-19 world. Let me venture to say that I believe that at some point very soon, a Supply Chain Audit will become a standard part of a company’s yearly published audit results and accredited auditing firms will be tasked with applying a series of accepted auditing standards as part of an annual audit of every public company such that all investors have a sense of the degree of risk that exists in the company as it pertains to the company’s ability to continue to conduct business should there be a fault in the company’s supply chain related to its principal revenue generating product line.
JE: Do you see a possible turn away from globalization and instead a drive for startups to localize supply chains?
BC: No, not completely. Turning completely away from globalization may put some companies at a great disadvantage both in terms of functionality of their products and in price. These companies, if choosing or forced to use only local suppliers, could end up with a product that is not competitive and lose market share or worse, go out of business completely due to the inferiority of their product because the competition is using global sources. The trick is balance and selective sourcing. Source locally if the material being sourced is competitively priced and not a competitive differentiator in the marketplace. Source globally from a supplier or country that is not a hostile player and with whom the U.S. has bilateral trade agreements and mutually accepted legal agreements that are enforceable with penalties for non-compliance. Have backup plans in place for failure to deliver. It would truly be a luxury if all of the components and raw materials that are needed to produce and deliver all of the products of Company A were available from local (USA) supply chains and it were not to Company A’s advantage to acquire these from any offshore sources!
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About Bill Clifford
Bill Clifford is Chief Executive Officer of Spencer Trask & Co., a privately owned advanced technology incubation firm. Prior to joining Spencer Trask & Co., Mr. Clifford served as Chairman of the Board and Chief Executive Officer at Aperture Technologies Inc., General Partner of The Fields Group, and General Partner of New Vista Capital. He is also the former President and Chief Executive Officer of Gartner Group, the world’s leading authority on the information technology industry, user and vendor technology strategies and market research. During his tenure at Gartner, annual revenues increased from $175 million in fiscal 1993 to $780 million in fiscal 1999.
Mr. Clifford currently serves on the board of directors of Cybersettle Inc. and SWK Holdings (SWKH.OB). He has been featured in CEO Magazine, Leaders Magazine and Forbes, and is a keynote speaker and panelist at numerous Technology Industry conferences.