You can’t operate a business efficiently if you’re in survival mode. If you stop reading here: avoid survival mode by giving yourself a margin of safety!
This is a lessons learned post. This lesson has cost me a great deal to learn.
If you are an entrepreneur, you are comfortable taking risk. You take an above average amount of risk. This, it is my belief, pays off, because most people play it too careful and end up overestimating the consequences of failure, which robs them of positive outcomes in their life.
The other side to that coin, though, is that as an entrepreneur you are more susceptible to taking on too much risk. As you progress in your journey of risk taking, the rewards of the risks you took that paid off de-sensitize you to the potentially disastrous consequences of events where the unlikely scenario materialized. So you end up discounting those possibilities.
This is especially true of risks associated with execution. When you plan, you consider the chances of bad outcomes mostly in isolation. But if you look at the post-mortem of any disaster, you see a repeating pattern. It is normally a confluence of events with bad outcomes (the ‘perfect storm’) that produces an unexpected result.
In business, we have the wonderful construct of cash. It is an amazing tool because so much of what we do is connected to it. Cash is a currency that we can use to transform many problems. You can solve a sales problem, a marketing problem, a legal problem, a scaling problem, a technical problem, almost any problem with cash. This is why we say ‘Cash is king’. Cash gets pre-eminence in the entrepreneurial tool chest because of its versatility in value creation. Cash de-risks almost any situation and its absence increases the risk.
This is why running out of money in business is so risky. Startups run out of money all the time. Startups are chronically undercapitalized. The VC community preaches the “don’t run out of money” mantra aggressively. But despite this, it still happens all the time. For understandable reasons. But I don’t want to dwell on why startups run out of money.
Instead, I want to simply point out that, as they approach this point, companies enter into Survival Mode. And describe the dynamics of Survival Mode.
Think about the following situations in life:
- A person who survives on less than $2/day – their day, every day, from sunrise onwards, is a constant struggle to put food in their bodies and on the bodies of their family. Sometimes this activity of putting food in their bodies will take well past sunset. Nourishment wipes out any time for anything that might improve their situation. (This, BTW, is why Microcredits are one of the most powerful ideas of our century)
- A football team that is behind on the scorebard when it arrives to the 2 minute warning – the lack of time in the game forces them into taking huge risks to get posession, and if they have possession they are forced into a risky 2-minute, or even 1-minute drill. During the drill every play becomes a must win play. Every down has to move the chains AND stop the clock.
- An airplane that is about to land – in the final seconds, as it hovers above the runway, it performs a maneuver called a landing flare, in which the pilot points the nose of the airplane upward. But as it does this, the airplane is likely to loose speed and possibly stall. Every little control input becomes a do or crash maneuver.
In all these situations, the subject, be it the poor person, the football team or the airplane, are operating in critical conditions, or Survival Mode. Any mistakes will have far more disastrous consequences than under normal operating conditions.
So for businesses, Survival Mode is when you are close to zero cash. A business in survival mode:
- Struggles with execution as its management goes out of its way to get out of survival mode.
- Struggles to retain its talent
- Does bad or worse deals as its negotiating hand gets weakened
- Puts strain on its partners and suppliers who become a de facto source of finance through aging of the A/P
- Destroys long term value by focusing on short term outcomes
- Rapidly deteriorates morale
As you can see, this is highly inefficient, and a plausible prelude to actual failure. So how do you avoid being in Survival Mode?
- Raise more money than you think you need
- Spend more frugally than you think reasonable
- Hustle more / execute with more intensity than what feels right
- Be more aggressive than your nature when it comes to deal making
- Save for a rainy day
- Make more conservative financial projections. Then, when you’re done, make them even more conservative.
- Have a Plan B for everything that is a big revenue contributor.
Survival Mode is no fun. And you can avoid it by giving yourself a bigger margin of safety. And still, you will be in Survival Mode. And then, may the force be with you.