In this episode of Lehigh University’s College of Business IlLUminate podcast, we are speaking with Joshua Ehrig, professor of practice in the department of management for Lehigh University’s College of Business. Ehrig is teaching undergrad and graduate and he teaches courses in entrepreneurship, strategy and innovation, and says that previously he was a serial tech entrepreneur.
He spoke with Rob Gerth, director of marketing and communications for Lehigh Business. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.
Below is an excerpt from that conversation.
Read the whole podcast transcript.
Rob Gerth: Let's start with a quote I read on the internet, "If your business model today looks the same as it did at the beginning of the month, you're in denial and possibly out of business." What's your reaction to that?
Josh Ehrig: Your business model should be continuously evolving as a startup regardless of the macro environment. Most startups are in that search stage, not the execution, where they're searching for a product market fit, searching for a viable business model. So, quite frankly, startups should always have some kind of continuous feedback mechanism across the value chain, I think it's really important. I think that's actually important for all companies, but specifically startups where you have that kind of much reduced time and resources involved.
Now the attention is on extending runway. Runway meaning amount of cash flow you have remaining as a company and it's all about the cash flow. Reducing the net burn, what you bring in verse what you bring out. And it's really become about client preservation. One of the companies I'm on the advisory board for, they lost about a quarter of their bookings in one day about two weeks ago. And they went from complete client expansion to complete client preservation. So really we've seen the risk/reward pendulum kind of swing at the opposite direction and really startups are kind of entering what we call nuclear winters.
Essentially-- entrepreneurship's really hard let alone all this additional adversity. So in this environment your projected lifetime value of a customer may not be realized, at least as fast as you'd want it to be. And that's where the burn rate and runway becomes more of an issue. And as a result, you may need to not only reduce head count, but also your customer acquisition costs and actually be smart with your marketing sales spend to keep the CAC/LTV ratio viable (where CAC = customer acquisition costs and LTV = lifetime value of customer). ratio viable. Once again, it's a paradox, right? Because the customer acquisition costs, you likely want to increase it to gain market share over the long run and enhance lifetime value of that customer.
Gerth: Is denial and delayed action the biggest mistakes a CEO can make at this point?
Ehrig: I think it's really important to look in yourself in the mirror and-- because these are kind of moments that define you, whether it's personally or professionally. In the case of startups, it's also about kind of conceptualizing who you are as an organization, now and moving forward. When you have this kind of crisis acceleration and these structural changes that create opportunity, for certain companies, startups specifically, they may be able to be more reactive and responsive to those situations, assuming they had the appropriate runway. Or they may be pivoting based on the fact that they want to conserve runway, but I think in certain cases it actually sparks a lot more creativity in the process.
From an entrant startup perspective -- there's a lot of unintended consequences that are going to emerge based off these structural changes right now, that I think are going to define or mediate certain industries. And as an example, if you look at the sharing economy, it was kind of a secret 10 years ago, right? If your kids had come up to you 10 years ago and said, "Hey, I'm going to actually be at a sleepover this weekend, so I'm just going to rent my room out to a stranger. I don't actually need a ride because I'm going to have a stranger pick me up." Ten years ago you would have laughed and 10 years later, that happens all the time.
So some of these fundamental truths start emerging, but these unintended consequences, so, I mean, if you look at the web browser. That created social, like Facebook, LinkedIn, it created Amazon, which enabled-- which disintermediated retail. You look at Wikipedia, Twitter, and different ways of content dissemination which disintermediate newspapers and so forth. And so the question becomes as psychographics change based off these structural changes, what are the opportunities there and the unintended consequences involved with those opportunities that would create disintermediation and enable startups to actually capitalize on total addressable markets, right, that didn't even exist five years ago.
Gerth: So I'm seeing disaster and you're seeing opportunities.
Ehrig: Yeah, if we don't continue to progress, in these times, in these circumstances, what are we doing? And it's kind of like when everyone wants to deploy capital, you're probably at the end of a cycle. But ironically when capital preservation mode is on, this is probably when you want to deploy capital. So it reminds me of the Warren Buffet quote, when people are fearful, be greedy and when people are greedy be fearful. So cycles play out. Like human behavior never fundamentally-- seemingly never fundamentally changes. The games and rules just evolve over time and how do you evolve with those games and rules? I mean, building a company, it's really a game at the end of the day. And the rules do evolve over time. So when you talk about optimism verse pessimism, either way you need to adapt, especially given limited time and resources of startups.
Gerth: Are there tips for CEOs that you would like to see them execute as far as handling people?
Ehrig: With the startup CEOs I've spoken to recently, my biggest advice has been, be honest. Be honest with yourself; be honest with your employees. Because this is their lives at stake as well. But you've got to be honest and make those hard decisions. It's kind of like firing somebody, not firing them fast enough if they're not a good fit. Because it only creates more problems and issues and is more costly later on. So in this case, it's pretty simple - be honest about where you're at, what you need to do. Building a startup is not about making everyone happy all the time. In fact, it can be quite miserable sometimes. If it was so easy everyone would be doing it.