Jeff Jordan | Vox

The ‘Oh, Shit!’ Moment When Growth Stops

2019-03-06T05:41:37-05:00

“A relationship, I think, is like a shark. You know? It has to constantly move forward or it dies. And I think what we got on our hands is a dead shark.” — from the movie “Annie Hall”

Most high-growth businesses stare down periods when growth unexpectedly slows down or stops altogether. At some point, that stomach-churning moment has visited the leadership of most of the companies I’ve advised. We also faced it at OpenTable, eBay and Reel.com when I was managing them. And it has reputedly happened to a number of today’s mightiest Internet businesses as well, including the likes of Amazon and Facebook.

CEOs at high-tech businesses work hard to keep as much growth going for as long as possible. Investors — both public and private — tend to value growth over everything else during most investment cycles, and the recent cycle has been no exception. Growth is where all the action is, and to where all the money flows. The reason for this is that the majority of returns are driven by a handful of companies that “break out.” And a business can’t get big enough to break out if it isn’t growing.

Of course, there are a number of key performance indicators for managing a business well and toward profitability — which we’ve written about here and here — but there are still times in most growth companies where that growth trajectory was interrupted. Sometimes it happens gradually, but in a surprising number of cases it happens suddenly: The business is growing one day, then it’s not growing the next.

I’ve taken to calling these growth hiccups “Oh, shit!” moments for CEOs. So what do you do when the growth rocket judders?

Entrepreneurs’ reactions to these moments fall into one of two extremes: There is the preternaturally calm CEO who resolves to watch the metrics closely to see if they change; he or she is concerned that a hint of panic will cause the rest of the team to panic, so they “Zen it out” as best they can. Then there is the CEO who freaks out, setting off alarm bells that reverberate throughout the entire building and continue ringing in every single employee’s ears.

Which approach do I advocate? The freak-out, of course!

Why? Because the unexpected slowing of growth in a “growth” business presents an existential risk to the company. Growth rates over a company’s history tend to move only one way over time (down); even in hypergrowth companies, growth rates tend to fall to earth … which is why I’ve referred to this effect as “gravity.”

Once gravity takes hold, it’s very hard to reaccelerate the growth of the business. Slowing growth portends a strong possibility that the company will never again experience prior levels of growth going forward. There are precious few examples of this happening on a sustained basis: Amazon accomplished it during 2010-2011, contributing to its value today. We accomplished this during my tenure at OpenTable, leading to a fourfold growth in market cap over six quarters.

But growth will never resume magically.

If CEOs can figure out what exactly happened to cause that slowdown, it presents them with the opportunity to try to correct what went wrong. Yes, they’re still freaking out — but with a plan to fix things. Here’s the process behind getting to that plan:

Drop everything else and focus exclusively on figuring out why.

At eBay, we took to calling these “911s,” basically declaring a state of emergency and clearly establishing that nothing was more important than diagnosing the cause of the slowdown. We got all hands on deck: Meetings and travel were canceled, a war room was set up, copious amounts of food and caffeine were brought in.

Involve all the key people whose skills/expertise is needed to diagnose the underlying cause.

Trying to keep the situation secret from the rest of the company so they don’t “lose faith” is futile. First, they’re going to know sooner or later (and frankly, nothing will cause an organization to lose faith more quickly than observing that its CEO appears disconnected from the reality of the situation). Second, you are far better off enlisting them than falsely shielding them. A well-coordinated group of people can cover more surface area more quickly than just a few people.

Search maniacally for underlying causes.

Growth doesn’t screech to a halt for no reason. It’s usually because something changed, even broader forces outside your company. Maybe a key upstream source of traffic made a change, such as Google shifting its SEO algorithm, or Facebook changing its NewsFeed algorithm. Or maybe critical partners impacted site performance, such as an issue at your payment-processing provider. Your job is to try to reverse it if within your control, or address it another way if not.

Assume the situation is self-inflicted until definitely proven otherwise.

I can’t tell you how many times a sudden dip in growth was caused by something fully in control of the business. Frankly, this is the best-case scenario, since you have full control over things in-house. In my previous companies, it was typically caused by our breaking or degrading key functionality on our own website when rolling out new code. Good news, as that’s more straightforward to fix quickly. (But I’d always expect a post-mortem from my team the next day to assess how we missed the issue.) If you know the cause, don’t let it happen again.

Make the search for these underlying causes systematic.

At eBay, we used to call this process “unpeeling the onion.” Start at the highest levels to find evidence about what changed, and then use those clues to work your way down into the details. When did the issue emerge? Did it emerge suddenly or more gradually? Was it experienced in all geographies? Was it experienced across all platforms (website, native apps)? Was it experienced in both organic and partner traffic, was it experienced consistently across partners? Was it a top-of-the-funnel issue, or an issue with conversion in the funnel? What did competitors do, and when did they do it? Is your customer-support organization hearing anything out of the ordinary from customers?

Divide and conquer so that you can get to answers as fast as possible.

Once you’ve set up a war room, do meetings every couple of hours. Start by having the core group brainstorm potential causes, then delegate across team members to investigate potential culprits. Reconvene the group periodically to share what they have learned and reprioritize the next areas to investigate as you unpeel the onion. Do this until you are able to find the root cause.

Consider a Plan B if necessary.

If the startup gods are smiling, you will be able to figure out the cause of the issue and correct it. But if the startup gods aren’t smiling, and you can’t either figure out the cause and/or figure out how to correct it, it’s time to start working on a Plan B for the business. Plan B often includes kicking off a strategic process that ends up in the sale of the company before it becomes as obvious to others as it is to you that you’ve got a dying shark on your hands. This is what happened at Reel.com when it quickly became obvious that Amazon’s launch of the DVD/video category in November 1999 represented an existential threat. (Unfortunately, the shark died before the business could be sold; Reel.com shuttered operations in June 2000.)

A closely related situation to rapidly slowing growth is when a competitor starts to outpace your business. In most consumer segments, one company tends to emerge over time as the winner. That could be because they establish a network effect, or they have access to better employees and more capital at better terms. But falling into the rearview mirror of your key competitor can potentially be a strong existential threat to your company, so it also merits running the “Oh, shit!” game plan. This doesn’t mean you can’t still build a great business. But if you’re going for winner-takes-all, you might consider changing your business altogether as another Plan B.

The best CEOs take immediate ownership over the situation and leap into action. They don’t make excuses, and they don’t accept excuses. They assume that growth is under the control of the company — even if it isn’t — and they work like crazy to get it back. Companies run by CEOs with these instincts are highly correlated with the most successful companies.

So, when growth slows or stops, feel free to freak out. In fact, feel free to freak out even sooner than that. You’re going to want to anyway, and you certainly have my encouragement! Hopefully, you now also have a plan.

Jeff Jordan is a partner at Andreessen Horowitz and serves on the board of Airbnb, Belly, Tilt, Instacart, Lookout, Pinterest and Walker & Company, among others. Prior to a16z, Jeff was president and CEO of OpenTable, which he took public in 2009. Before OpenTable, he was president of PayPal, and he was previously SVP and general manager of eBay North America. Follow him on his blog and @jeff_jordan.

This article originally appeared on Recode.net.

The Tipping Point (E-Commerce Version)

2019-03-06T05:40:23-05:00

The news around shopping during the holiday season was dominated by two separate stories. One talked about how traffic to brick-and-mortar stores was well below expectations, and that these retailers were forced to discount tremendously to drive sales. The other talked about how an enormous late surge in packages coming from e-commerce companies overwhelmed the capacity of UPS and, to a lesser extent, FedEx, and caused many of these packages to arrive after Christmas.

But, to me, these two stories are not at all separate, they simply reflect different sides of the same narrative: We’re in the midst of a profound structural shift from physical to digital retail.

The drivers of this shift are simple:

Online retail has strong cost advantages over its offline counterparts and is rapidly taking share in many retail categories through better pricing, selection and, increasingly, service.
These offline players have high operational leverage and many cannot withstand declining top-line revenue growth for long.
The resulting bankruptcies of physical retailers remove competition for online players, further boosting their share gains.

So, how has this shift been playing out? Recent data suggests that it’s happening faster than I could have imagined.

The U.S. Census Bureau publishes what I consider to be the most accurate figure on e-commerce penetration in the U.S. It reports that e-commerce penetration of total retail sales in the U.S. was around eight percent in 2012. But, as I’ve blogged previously, this aggregate figure seriously underestimates the impact of e-commerce in large sectors of the retail landscape. Let’s unpeel the onion and look at the next level of reporting from the Census Bureau, where it segments the retail landscape into six large categories of goods. It’s at this level that things start getting more interesting:

The data suggests that there are two very different patterns going on with respect to e-commerce penetration. The two largest categories — “Food and Beverage” and “Health and Personal Care” — show e-commerce penetration well below the overall average. These categories essentially are the domains of grocery stores and drug stores, and e-commerce (at least to date) has achieved only modest penetration of these massive categories (but Amazon Fresh has designs on changing that).

The other four categories are what I would consider to be the domains of traditional specialty retail categories, the ones that are transacted in the malls of America. All of these demonstrate e-commerce penetration well above the overall average, ranging from a low of 12 percent for “Clothing and Accessories,” up to 24 percent for “Media, Sporting and Hobby Goods.” It’s in these specialty retail categories where e-commerce to date has had its strongest impact.

One additional observation is that the pace of online share gain in the specialty retail categories shows absolutely no signs of slowing down. All of these charts are “up and to the right.”

So it’s clear that a growing share of the retail pie in the specialty retail categories is being captured by e-commerce. Now let’s throw in one more massive complication for brick-and-mortar retailers in these categories: The total retail sales in these markets have been extremely sluggish, and have barely recovered back to pre-recession levels. This is a toxic combination — physical retailers in these categories are losing share of a total retail pie that isn’t growing. The inevitable result is that the portion of the pie left available for physical retailers is shrinking rapidly:

And that’s just what’s happening. The Census Bureau reports that the four specialty retail categories representing total sales of just over $600 billion grew by only $5 billion between 2007 and 2011 (the last date that this level of detail was reported). That’s less than one percent over four years. The e-commerce players increased their cumulative sales in these categories by $35 billion over the time period. This means that the cumulative sales of brick-and-mortar retailers shrank by $30 billion in just four years!

The result of these macro shifts is a Darwinian struggle playing out in the malls of America among physical retailers. Some recent retail news:

It’s getting hard to find a physical bookstore, music store or video store these days. In books, Borders has closed, and Barnes & Noble has reported continuing declines in comp store and total retail sales in its second quarter. All major music retailers are out of business. And the Dish Network recently announced that it would close its remaining 300 company-owned Blockbuster stores in early 2014.
Office-supply retailers are under pressure, as the paperless office is finally arriving. Office Depot and OfficeMax recently completed their merger, and will likely consolidate stores. Staples reported a four percent decline in comp store sales in their most recent quarter, and has closed 107 stores in the past year.
Electronics retailers are facing enormous pressure. Circuit City has closed. Best Buy recently declared that “show-rooming is dead,” as it offers to match the prices of 19 online retailers and all offline retailers. The next day, it warns of potential profit shortfalls from the hot promotional environment. And all of the computer superstores are long gone.
Apparel retailers serving the youth market are facing big headwinds. The “Three A’s” (American Eagle, Abercrombie & Fitch and Aeropostale) are all performing poorly, with declining sales and stock prices. It feels pretty likely that a key factor in these declines is early-adopter teenagers turning to online alternatives like Nasty Gal and Stitch Fix.
The general-merchandise department store is under siege. Sales at Sears have declined for 27 straight quarters (for you keeping score, that’s almost seven years). And it just announced that it is spinning off its Land’s End subsidiary, following its divestitures of Orchard Supply Hardware and Sears Hometown and Outlet business. Says Brian Sozzi, chief executive of Belus Capital: “Sears is in a steady state of decline. … They’re essentially selling their body parts so they stay alive today.” J.C. Penney continues to be in the intensive-care unit, with declining sales and substantial losses, and the SEC just launched a probe “requesting information regarding the company’s liquidity, cash position, and debt and equity financing.”

The stark reality for brick-and-mortar retailers is that there currently are just too many stores. Remember, these retailers have very high levels of operating leverage, and a meaningful decline in sales can quickly render them unprofitable and eventually unviable. And $30 billion in lost sales is most definitely a meaningful decline in sales. It’s not surprising that few retailers are opening new locations, and that a large number are shuttering existing ones.

The retail world is changing, and we’re seeing creative destruction play out before our eyes. And the speed at which it is happening is absolutely stunning. UPS and FedEx had better start building out their fleets, big time — these trends are only accelerating.

Jeff Jordan is a partner at Andreessen Horowitz and is on the boards of Airbnb, Belly, Fab, Circle, Crowdtilt, Lookout and Pinterest, as well as Wealthfront and Zoosk. Prior to a16z, Jeff was president and CEO of OpenTable, which he took public in 2009. Before OpenTable, he was president of PayPal, and he was previously the SVP and general manager of eBay North America. Follow him on his blog and on Twitter @jeff_jordan.

This article originally appeared on Recode.net.