How to survive the recession: Hibernate
Big Moving Pictures had a new advertising product ready to go, but when its customers axed their budgets, the company didn't fail. It went to sleep.
After two and a half years of development and a total investment of about $2 million, advertising start-up Big Moving Pictures was just about ready to start signing customers and generating revenue.
Then, in September of 2008, financial disaster struck Wall Street. It was right before the big unveiling of the company's product. BMP's potential customers--large consumer advertisers--lost their budgets. The best contacts at customer companies got laid off. The start-up found itself in a business wasteland. It was ready to go. But its pipeline to revenue had dried up.
It was a disaster for the company, but CEO David Knight (disclosure: a friend) didn't think it meant he had to fold up shop. To his mind, and those of his financial backers, the idea was sound; it's just that the timing had gone bad. Knight found his business in a unique situation that let him execute an unusual business maneuver: he put the company into hibernation.
Knight cut expenses to near-zero, convinced his creditors to cut the company a lot of slack, and stopped angling for new business. It was all to put the firm essentially into deep freeze while he waited for the economy to recover enough to be able to support his business.
BMP's business is placing ultra-large high-resolution video displays at airshows and similar events, and using those displays to show live footage from cameras mounted in and on the vehicles performing at the show (the ability to get permission to mount HD cameras on military aircraft is one of the company's competitive advantages). Wrapped around that unique video are interviews, pre-recorded features, and advertising, the source of BMP's revenues.
Big Moving Pictures promotional video.
Before putting Big Moving Pictures on ice, Knight says he looked at the usual accepted alternatives, including raising money to bridge the recession. He said that would have been both difficult, dilutive to the employee shareholders, and pointless, since there was really nothing of additional value the company could accomplish without customers. He also looked at changing the business model radically into one that didn't rely on advertisers, but did not come up with a concept that made sense (although he is working on some ancillary video productions using his well-placed cameras).
How to put a business into suspended animation
When companies start putting money back into advertising experiments, Knight is convinced, his business will again become viable. But as BMP was still pre-revenue before the market crash, he found himself able to simply turn off the lights without actually killing the possibility of turning them back on.
Here's how he did it.
First, Knight had to inform his key partners, especially friendly potential customers that were close to going into trials with the service, that he was not going to provide any services until the market turned around. He had to get their agreement that this was OK. Since most of his contacts and partner companies were adopting protective postures themselves, it was not a big problem.
Second, he had to bring BMP's cash burn to a halt. All stakeholders--employees, funders, suppliers, banks--had to buy into this. Convincing creditors that he was neither bankrupt nor, paradoxically, able to pay them a cent, took some work, he says.
As part of stopping the cash burn, of course, he had to stop paying employees. Yet he also wants them to come back when BMP becomes a viable operation again. There were two components to making this likely. For key employees already participating in his company's stock option plan, he kept them vesting on their normal schedule, even though he stopped paying their salaries. They thus remain, literally, invested in the company's eventual success.
He also did his best sales job to convince them to take project-based contract jobs over full-time gigs, when possible, so he'd be more able to quickly get the band back together when needed.
Other cash-sucking operations were killed outright. He shut down the office (fortunately, he did not have an onerous lease hanging over his head), and opened a post office box instead. He moved all the phones to Vonage accounts and forwarded the numbers to personal mobile phones.
The BMP Web site costs next to nothing to maintain. And when, because of it, he gets nibbles from potential customers, he does not jump on the plane to make a pitch and get new business. He's holding fast to the zero-expenditure mantra. He wouldn't be able to service new customers if he got them now, anyway. "One client won't tip the balance at all," Knight told me. "So we're not flying around to pitch."
Planning for the re-start
Knight believes he can keep BMP in stasis until the third quarter of this year. "It's not about the cash," he says. "But it's a seasonal industry and if we can't restart by then, we wouldn't be able to execute by the end of the season." Adding another year to the hibernation means another year of change, and erosion of customer and employee relationships. If the economy does not look like it's coming around in about six months, he will consider a complete shutdown.
Assuming a re-start is possible, Knight says, "it will be far cheaper and faster than if we shelved it all and started a new company to do this." That's assuming that he can get key people back on board. He estimates about half of the 17-person staff will be available.
Big Moving Pictures was at a unique transition point in its business that allowed it to perform this maneuver without jeopardizing its relationships with potential customers. It wasn't easy to put all the relationships that made the business work on ice, but that's what Knight has been working on for the past three months.
With no customers to service and no more development to do, the meltdown came at the best possible time for BMP. Had it come after he had customer contracts to honor, or in the middle of the product development, he would have had to find a way to keep the lights on. Shutting down temporarily makes sense--for this business, and at this time.