Facing the Dust Storm
Options for startups to manage through economic crisis
In the summer of 1934, American Plains farmers were facing twin catastrophes. The US was in the throes of the Great Depression, and demand for the farmers’ wheat crops had cratered. Moreover, the region was experiencing a rolling series of severe dust storms, with a recent storm blowing dust clouds thousands of feet high from Chicago to the Eastern seaboard. In addition to devastating crop yields, the storms disrupted daily life and even caused deadly pneumonia in children. While the Plains farmers couldn’t control the American economy, they felt they controlled their own circumstances, and mostly perceived the storms as one-time events that would quickly pass. The farmers prided themselves on being “next-year” people: believing next year’s harvest would be more bountiful than the last, recuperating any losses.
Instead, the relentless dust storms continued throughout the decade in an ecological calamity known as “The Dust Bowl.” Triggered by a severe drought and over-plowing, the Dust Bowl shaved nearly 0.5% off of US GDP while its particles infected and killed 7,000 people. Incredibly, many farmers clung to their “next-year” people identity, too proud to adapt to a new reality and change their way of life to survive.
Today, in addition to public health and economic effects, the coronavirus pandemic may cause something akin to a “Dust Bowl” in startup land. Much ink on preparatory planning has been spilled already, from Sequoia’s “Black Swan” warning to Steve Blank’s “Virus Survival Strategy.” Several of these provide excellent advice on how startups can “batten down the hatches” to weather the current storm, cutting expenses swiftly and deeply, and treating cash like it’s oxygen on Mars.
But what about when the storm passes? Will your business look or perform the same as it did before the virus began consuming our daily lives? Or will the world look a bit different, requiring an adjustment to your product, market, strategy, or technology? Some epidemiologists warn that the spread of the novel coronavirus (COVID-19) could resemble a rolling crisis akin to the lethal 1918 flu epidemic. Absent aggressive public health measures, COVID-19 may resurface after the summer months.
In the 1930s, Plains farmers took a wait-and-see approach. Many viewed the first few storms as one-off nuisances that could be managed. Hindsight is always perfect, but the consequences of their decisions were devastating, and likely could have been mitigated with more planning.
How can your startup prepare for a rolling crisis when you’ve already cut expenses, yet your revenue sources remain susceptible to the same event — just as the 1930s Dust Bowl farmers were?
Here are three options that could help startup CEOs prepare:
Option 1: Reflect on your stocks, explore new flows
At their core, most businesses possess “stocks and flows.” Stocks represent assets and capabilities (resources), while flows consist of revenue and expenses. The Plains farmers’ flows predominantly came from wheat crops, which were now a badly damaged and declining stock. Besides “wait-and-see,” the farmers had two reasonable alternatives: pick up and move to sell wheat elsewhere, or use the plot of land for a different purpose entirely.
Consider your underlying stocks and the various ways you can utilize them to generate different flows from the ones you’re producing today. These capabilities could be technological knowledge, a unique distribution model, or even company culture. For instance, in 2014 eyewear startup Warby Parker leveraged its deeply trusted brand (stock) to open select brick-and-mortar locations near its customer base (flows). Before the pandemic, their sales per square foot were second only to Apple. This is analogous to the scenario in which Plains farmers sold their wheat elsewhere, applying a core competency to generate new value.
To be sure, if your stocks are unrelated to product or technology, identifying a new flow may prove challenging. During the Dust Bowl, rather than move to neighboring states that offered more fertile soil and less exposure to drought, the Plains farmers largely stayed put; if anything, they were more likely to migrate to another Dust Bowl-affected state. As tremendously proud next-year people, moving may have seemed too drastic a change.
As an entrepreneur, it’s best to swallow your pride when you’re in the middle of a storm. This is the time to be a wartime CEO. That doesn’t mean barking orders at people, but rather doing what’s necessary to “fend off an imminent existential threat” to your resource stock. The venture community often calls this a “pivot.” In practice, pivoting may mean shifting your business model from selling to consumers (“B2C”) to selling to other businesses (“B2B”), or even entering a new category altogether. A clear example is Twitter— initially started in 2005 as a podcast discovery network called Odeo, CEO Evan Williams soon realized his concept wasn’t sustainable in the face of Apple’s formidable iTunes product. However, he leaned on another stock — his team — and encouraged the crowdsourcing of new ideas. Williams settled on an idea from an engineer named Jack Dorsey, who proposed a tool that enabled users to send short 140-character text message status-updates to groups of friends. Williams, with Dorsey as one of the co-founders, officially launched Twitter in 2006, now a publicly traded company (NYSE:TWTR) that heavily shapes public discourse and generated nearly $3.5B in revenue during its last fiscal year. Of course, Williams later went on to found and become the CEO of another blogging platform, Medium, where you’re likely reading this story.
By mapping out all potential new flows from each of your stocks, you can quickly pursue new revenue streams should your current one dry up.
Option 2: Pool resources
Upon realizing the dust storms were not isolated events, the Plains farmers also could have formed alliances with farmers in less-affected regions to mitigate losses and extend their reach. An enterprising Oklahoma wheat farmer could have forged an agreement with a Missouri peer, distributing Missouri wheat through his Oklahoma network and taking a percentage of the revenue. Pooling resources in such a manner could have hedged the Oklahoma farmer against a bad crop season, while extending the Missouri farmer’s reach into an otherwise untapped buyer network.
Startups can look to a similar strategy in trying times. Pooling resources could come in the form of a commercial agreement with a large corporation, as my colleague Scott Lenet’s recent Forbes article detailed, or even considering M&A opportunities. Foursquare’s merger with Factual earlier this month illustrates the pooling strategy, combining Foursquare’s strength in ad attribution technology with Factual’s leading audience targeting capabilities. After the crisis passes and marketing spend ostensibly resumes, the combined company now known as Foursquare Labs will likely be better equipped to help CMOs target their high value customers more effectively.
If your flows look dry but you have a strong balance sheet — at least 18 months runway — you could also consider buying a worse-off competitor. On the other hand, if your balance sheet is weaker, you may want to talk to potential acquirers — their own flows may benefit from your valuable stock.
Option 3: Close shop
The fierce dust storm that swept the Plains on April 14, 1935 became known as “Black Sunday,” surprising even those accustomed to the storms; it moved 300 million tons of topsoil, displaced hundreds of thousands of people, and put many farmers out of business almost overnight.
The COVID-19 pandemic could be our Black Sunday. Its sweeping spread has surprised, disrupted, and altered our personal and professional lives. Like the Plains farmers, we don’t know how the long the impact will last or when the storm will finally calm.
As a startup CEO, if you’ve exhausted the options above and are uncertain how you’ll keep the lights on, you may need to consider shutting down your business. This could be a temporary move, furloughing the majority of your employees and only keeping a “skeleton crew” until demand picks up again. Or, it may need to be permanent. While an excruciatingly difficult decision, respectfully parting ways with your employees, customers, and investors can be the right thing sometimes. Consult a mentor, advisor, or even a close friend as you deliberate, as she may offer a more clear-eyed view of your predicament. As the late Kenny Rogers sung, “You’ve got to know when to hold ’em / Know when to fold ’em / Know when to walk away.”
Undoubtedly, these are uncertain and solemn times. As a history major, I’ve always found solace in looking to the past as a guide to understanding the present. Perhaps you’ll learn from the Plains farmers’ plight too.
Jack Taylor is a Principal at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help leading corporations launch and manage their investment programs.
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