COVID19 Crisis, Business Advice and First Principles

I have written a few general posts about the COVID19 crisis already. Today I want to address all of those running a company or making management decisions with a simple message: avoid generic business advice! By generic advice I mean anything of the form “do x,” such as “cut 20% of cost now.” Why? Because it may or may not apply to your specific situation.

Across the USV portfolio, the COVID19 crisis has had wildly different impact on companies. Some companies are experiencing dramatic acceleration in growth, whereas others are seeing massive slow downs. If you are providing services such as distance education, subscription food delivery or services for remote teams demand for your service has just grown dramatically. Conversely if you are relying on advertising you are probably experiencing a significant contraction.

So what then is an alternative to generic advice? First principles. These can form the basis for figuring out what to do and also for evaluating advice. A crucial first principle in business is that you cannot run out of money. Bankruptcy is an absorbing state. It means that everything ends and nothing else matters. But you have to do the work to figure out whether COVID19 means you will run out of money faster or slower than before (or not at all for that matter).

And that’s not as easy as just looking at what is happening to your demand. Why? Another first principle of business is that financing needs are determined by cash flow patterns of the operating business. A corollary to this first principle is that growth can generate or consume cash depending on your working capital situation. If you have positive working capital and grow faster you consume cash. Conversely, if you have negative working capital then faster growth will produce cash.

And even that is not as straightforward as it may seem. Why? Because in a crisis a negative working capital business can flip into a positive one (which despite the terms would be a bad thing). All of your suppliers may suddenly insist on getting paid early because they are experiencing cash flow issues of their own. Conversely depending on the position you are in you may have the opportunity to go from a positive working capital business to a negative one (for example if you are providing an essential service that customers may want to prepay to assure its availability).

So as you are analyzing the impact of COVID19 on your business approach everything from a first principles perspective. One crucial aspect of first principles is that they let you evaluate risk even when you don’t have data yet. For example, you can see that flipping from negative to positive working capital may be a risk for your business even before you have suppliers asking for different payment terms.

Nothing I have argued here is really specific to the COVID19 crisis. A first principles based approach is always superior to the indiscriminate application of generic advice. It is just that in a crisis everyone is shouting generic advice even louder than normally.