The Storm Is Coming

Photo by Micah Tindell on Unsplash

My morning news scan predicts a long winter. Fuel prices in Canada are expected to rocket past CA$2.25/litre (US$6.20/US gal) by January, just 60 days from now. Interest rates will continue to increase. At the same time, house prices may come down, reducing homeowners’ net worth and ability to borrow, while rents will continue to rise. Federal and provincial governments are giving mixed signals about how they plan to respond. Some actions focus on short-term relief at the cost of the longer term, while others do the opposite.

War in Ukraine will spark conflicts in other parts of the world due to food shortages or could spread in Eastern Europe if tactics get ugly. On the other side of the globe, a retired Japanese admiral warns Canada and Western countries to look closely at the situation in Taiwan, which can flair up at any time. Political instability in the US, Canada’s continental roommate, could encourage similar shenanigans here.

In 2020, the unthinkable happened as society retreated behind closed doors, bringing the economy to a halt. This disruption put the wrecking ball to many popular assumptions about the economy. It also gave us a taste of what awaits us as the effects of climate change are increasingly felt daily.

I do not doubt that we are just experiencing the storm’s beginning.

Startup founders tend to view the future through rose-coloured glasses. This is expected because challenging the future is risky, uncertain and dangerous to one’s health, whether financial, mental or physical. This is why very few people leap into entrepreneurship. 

However, startup founders cannot afford to maintain an overly optimistic view of the world. Macroeconomic and microeconomic forces do not spare startups. Sooner or later, founders need to face the future with their eyes fully open.

The mot-du-jour in the tech world is “conserve cash”. In uncertain times, the automatic and natural reaction is to cut jobs, which immediately reduces the company’s most significant expense. However, this is the worst thing to do. It may save cash flow in the immediate term. However, this jeopardizes your future. Not only will it cost more to rehire, onboard and train in the future, but the cost in trust and reputation is even higher. If you become known as a hire-and-fire shop, you risk losing loyalty, which results in “quiet quitting” or “work your wage” behaviour.

The other instinctual response is to raise investment capital. But since most investors are also cutting back, this is a strategy with diminishing returns. 

The intelligent but challenging option is to develop a new mindset: become a master at managing uncertainty while maximizing execution. 

Managing uncertainty means developing the ability to recognize where things can go wrong, so you can act fast to mitigate losses and maybe even use the uncertainty as a trigger to pivot toward a better strategy.

Fulhaus launched in 2017 to supply designer-curated furniture packages to AirBnBs. They slowly built up their revenue to break through the $1M mark in 2019. However, revenues dried up as the whole travel sector shut down in early 2020, an event which even caused AirBnB to wonder what its future would be. Fulhaus’ founder, Andria Santos, faced a difficult choice: shut down or carry on. Andria had just closed a seed round at the end of 2019, which gave her some maneuvering room, so she and her team decided to carry on. But towards what? Would travel ever come back? In 2020, forecasters said travel would take 5 to 10 years to return to pre-pandemic levels. 

If the travel industry was going to be a bust, what market should Fulhaus serve? The team made a bold assumption: the pandemic was causing young professionals to redo their homes, condos and apartments. Demand for furniture was skyrocketing. Could Fulhaus position its offer of turnkey designer-curated furniture sets to this customer profile? How to deal with the much larger number of sales, smaller order amounts, and, most of all, quick turnaround times demanded by direct-to-consumer customers?

Serving the D2C channel meant rethinking the company. Designer-curated furniture sets could take up to 12 weeks to select, source and order. This had to be cut down to days, hours, and even minutes. The only way to do this was through technology, replacing the human designers, who were the main bottleneck.

This meant taking a bold risk: transforming from a furniture retailer to a technology company. 

Once the choice was clear, an action plan started to fall into place. As Andria’s team started to execute, initial efforts were positive. The AI-powered design recommender, christened Ludwig, blew past all expectations. In addition, as travel roared back in the first part of 2022, Ludwig attracted customers from their original B2B channel while increasing traffic in their new D2C channel. This helped to diversify Fulhaus’ revenue streams and provide additional stability for future growth.

How did Fulhaus succeed in managing uncertainty while mastering execution?

First, they took a step back to recognize the reality of their situation. This is the essential step in managing uncertainty. Recognizing your reality goes beyond assessing what you have and what you don’t. Managing uncertainty requires mapping the four biases that shape your perceptions:

– your HYPOTHESES: what you think you know about your envisioned future but have not yet experienced, or you have no tangible data to support;

– your ASSUMPTIONS: what you know to be true based on your experience, but what you don’t yet have evidence of in your present situation or envisioned future;

– your RISKS: constraints or elements are under your control and which present even the slightest possibility of causing partial or complete failure; and

– your DEPENDENCIES: constraints or elements which are *not* under your control and have even the slightest possibility of causing partial or complete failure.

Together, your Hypotheses, Assumptions, Risks and Dependencies, or the H.A.R.D. stuff, provide a clear and evidenced-based view of your uncertainties, through which you can then identify probabilities, severity levels, mitigation strategies and responsibilities. Uncertainty is no longer a threat; it is simply a situation to be managed.

The second part of succeeding in unpredictable times is maximizing execution. This is where gut-level decision-making falls apart.

Fulhaus had to let some people go, but instead of setting arbitrary numbers, such as cutting 15% of the workforce, they looked at which roles should serve with their new strategic direction. They also developed new capabilities and systems and, above all, established a new level of discipline.

They put into place detailed financial models to track their expected revenue and current use of funds. They established a disciplined, evidence-based marketing mindset which encouraged data-driven decisions based on metrics, doing lots of small experiments and looking for insights from the results, which they used to refine their next sprint of actions. 

Fulhaus was successful with its major pivot towards being a technology-driven company. By 2022, they recovered their losses and blew past their revenue forecasts while establishing a positive brand reputation across the US.

The storm is coming. If the 2010s were memorable as a period of predictable growth, the 2020s will be remarkable for its economic and social unpredictability. Founders who master managing uncertainty while maximizing execution will survive and thrive.