SPOILER ALERT: IT’S NOT “SPREADSHEET/ MEMO/ MEETING”
By Mike Ryan, BPN Co-Founder and CEO
Let’s start with something obvious: the coronavirus has changed the world profoundly, reminding us again how fragile health and human safety can be, mandating unprecedented social distancing, catalyzing a near total stoppage across massive segments of the economy and creating substantial longer-term uncertainty about the outlook for the future. These effects ripple differently through various regions, socio-economic demographics, industry sectors and individual companies in both human and economic terms, and will be studied by scientists, strategists, psychologists, policy advisors and decision makers for decades to come. I am doing the same things as everyone else to stay ahead of the news, except I leverage a powerful graph database software and team of world class research analysts at a company I co-founded, Bullet Point Network, to help me assess how the individual companies I am involved with may be affected by COVID, considering where we can buy or sell their securities, and advising those companies on the highly consequential decisions they are facing.
The public markets have a powerful (albeit volatile) discounting mechanism to adjust prices based on changing future outlook for different companies. While the private markets are different, it doesn’t take a genius to realize that hospitality groups or retailers where shutdowns reduce revenue by 100% should make different decisions from a work from home (WFH) technology provider, delivery services, telemedicine or remote education company experiencing surging revenues. Similarly, a firm needing external financing to fund working capital must take different actions compared to one sitting on two years of operating expenses in cash. The hard part is the first set of real questions: how much should spending change? With what timing or triggers? And in which areas? Even harder are questions about what product development, customer segmentation, capital raising and human resource prioritization should be pursued with the longer-term in mind. There are also lots of companies in the middle — not harmed or boosted as directly by COVID — but facing greater uncertainty in demand and financial markets. A few firms will have distinctly negative short-term cash flows but may benefit from substantially stronger long-term prospects due to COVID. In all cases, the key goal for companies should be maximizing their odds of achieving long-term-growth, profitability and scale on the other side of COVID, subject to the critical constraint of minimizing the odds of running out of money or permanently damaging their competitive position.
The COVID crisis loudly reminds investors about some basic questions we should always ask ourselves: What’s priced in? How much confidence can we have in the assumptions which drive our forecasts? How effectively are we updating our judgments to make incremental decisions with better insight over time? Have we properly quantified all relevant scenarios using logic and probability? And, perhaps most importantly, what are the odds of different cases playing out and what will the impact be on long term value?
The historic process for this type of scenario analysis centers on the insight of smart people Meeting to discuss, often capturing some of their research in a Memo (or PowerPoint), and quantifying a few ad-hoc “cases” in a Spreadsheet. Compared to being paralyzed with fear, or hasty with gut feel, there is nothing wrong with this “Spreadsheet/Memo/Meeting” process (and I used it myself for over 25 years), but wouldn’t it be better to continually update assumptions with the best available information, calculate 100 logical and probabilistic scenarios for actual cash flows and valuation based on your insight, and understand the odds of each scenario occurring before you make a major decision at the Company Board Meeting or Fund Investment Committee Meeting?
Quantify Stories in Scenarios with Bullet Point Network.