What can manufacturers learn from Venture Capital downturn advice?

Rob Bradenham

The parade of Venture Capital Firms sending advisory warnings to their portfolio companies has reached full speed in the past 3 weeks, including marquee firms such as Sequoia, Lightspeed, Andreessen Horowitz, Y Combinator and many others. Of course, much of this advice is likely pretty obvious to manufacturing leaders who have always had to manage their business prudently:

1. Funding is no longer ‘free’
2. Growth at all costs is not sustainable
3. Disciplined financial management and profitability are critical

To a group of manufacturing leaders, who have, throughout their careers, focused on modest growth rates and continuous operating margin improvement, these bits of advice are obvious. Most manufacturing companies are already conservative with new investments, typically cash flow positive and metrics such as cash burn or ‘runway’ are not in their normal lexicon. They are also prepared to go through the various forms of scenario planning and taking necessary steps to ensure the survival of their business, even in challenging economic environments.

While these VC investors do want to make it clear to their portfolio companies that times are changing, almost all of them also give a second set of advice – be prepared for new opportunities to emerge from a changing environment. Sequoia uses two quotes to illustrate:

• “You cannot overtake 15 cars when it is sunny but you can when it’s raining.” Ayrton Senna
• “Chance only favors the prepared mind” Louis Pasteur

So what does this mean for a manufacturer?

Are you going to ‘pivot’ to some completely new business and start making an entirely new product? Typically the physical investments are not going to enable a shift from producing water treatment pumps to medical instruments or retail IoT devices. However, there are often other opportunities, both in terms of the offers and value you bring to your customers as well as how you organize to execute. Here are a few things that manufacturers should be re-evaluating during these potentially challenging times:

• With likely decreased new equipment demand, look to other services and solutions to help customers maximize the value of their existing equipment (both yours and competitive). This requires a scalable, data-driven understanding of all of your existing customers – beyond just the key accounts that you have a deep relationship with.
• Changes in economic conditions will not impact your customers equally. Reevaluate which customers, segments, products and services you are focused on and will enable you to drive revenue. Ensure you are prepared to shift your focus – to do this, you need an understanding of all your customers.
• Reevaluate talent and workflows. Specifically, take advantage of the opportunity to modernize legacy workflows that are consuming critical human resources ( which are also becoming more scarce).
• Budget cutbacks will likely result in reduced IT resources and re-evaluation of technology projects. Are you actually achieving the desired ROI for those massive investments in generic platforms or in-house IT projects? Are you able to take advantage of data? With in-house projects and generic platform customizations – if you scale back your internal IT resources, will you still be successful on these projects? Have you evaluated purpose-built, vertical software solutions? Changes in economic conditions can be the impetus to shift away from the status-quo or a path that is proving to be long, costly and risky (but might be politically sensitive).

These are four examples. There are many other areas that higher capital cost, changing customer needs, and increased operating costs can drive greater clarity and focus on what is truly important, eliminate waste and distraction and position the organization to come out of the challenging times stronger. In addition to the necessary actions for survival, manufacturers would do well to also take heed of the adage: “Don’t let a good crisis go to waste” and ensure they take the opportunity to make the right moves for the future.