"Economic downturns separate the companies who have successfully differentiated themselves and built value for their customers versus the companies that are only surviving because there's too much easy money available from investors. "
Umesh Padval, Venture Partner
Economic downturns are stressful times for everyone, not least for CEOs who now face incredibly tough decisions to ensure the survival of their business. At this critical time, we all need to be mindful of conflicting advice and be extra careful that we are listening to the right people — those who are experienced in surviving and even thriving during times of adversity.
In this final part of the series, we talk to Venture Partner and former CEO, Umesh Padval about his many years of experience surviving economic downturns and what advice he offers the CEOs of Thomvest Ventures portfolio companies to help them navigate through the tough times and come out the other side stronger than ever.
We’re currently in the midst of a significant economic downturn. With such a long career, you’ve clearly survived many downturns.
Yes, I’ve experienced 4 downturns during my career, with the first being in 1984. 2001’s dotcom bust and 2009’s financial meltdown were the hardest ones I have gone through, and now the current one sparked by the global COVID-19 pandemic. In 2001, I experienced the financial crisis while running a company. By staying focused on serving our customers, we were able to sell the company during the economic crisis and create significant value for our shareholders and employees.
2009 was a different experience as an investor. A lot of our portfolio companies were adversely affected by demand falling off a cliff. They had to take drastic measures to cut operating expenses and strategically focus on fewer end markets to adapt the company to the new economic environment. I’ve always believed that the only constant in life is change. My firm belief is not to fight change but embrace it and capitalize on it by making positive changes to the business.
What were some of the things you did as a CEO to survive the downturns?
When you’re in an operational role during a downturn, you have to figure out how you’re going to cross the chasm when revenues slow down dramatically. You need to cut operating expenses to survive. However, you need to be very strategic about where you cut expenses and where you invest. That is the most critical decision a CEO has to make. But I’ve always believed in a lesson that someone taught me very early on in my career; when the economic conditions are tough, cut expenses and invest strategically in your future if you have the opportunity to do so. This will enable you to come out stronger and be better positioned than your competitors when the economy turns around.
Being in VC is different to being the CEO. How do you deal with downturns from an investments perspective?
Many great companies — Google, Facebook, Uber, Airbnb, and Stripe — were created during economic downturns. The lesson learned is that when things are going really well economically, there are too many investors and lots of infusion of capital chasing a broad range of deals. The valuation expectations are high and people are not disciplined enough when they invest. They just want to be part of the next shiny object in a hot segment.
I have tried to remain disciplined despite the competitive pressures. Experience has taught me the art of discipline. When things are really good, I’m more careful about investing at high valuations, even if I like the company. You have to stay focused on your core investment thesis of investing in the right company at the right valuation and stay disciplined in order to have solid returns on your portfolio.
During a downturn, people are initially in denial that their company won’t be affected. They’re optimistic, despite the changes around them, and believe they are an exception and deserve higher valuation whether they are selling the company or raising capital. Then reality sets in 9 to 12 months later when their business gets affected and capital starts drying up. This is when experienced investors seize the opportunity to invest in the best companies led by strong management teams.
During downturns, many companies thrive whilst others sadly fail, what are your thoughts on this?
I believe in the Darwinian theory; survival of the fittest. Economic downturns separate the companies who have successfully differentiated themselves and built value for their customers versus the companies that are only surviving because there’s too much easy money available from investors. While it’s unfortunate that people lose jobs, downturns are ultimately good for the consolidation of the industries and for surviving strong companies to make money and invest in their future. Downturns are part of the normal business cycles — separating strong companies, with differentiated platforms, led by great teams, from the weak.
One thing I’ve always done is support my CEOs 100% during the difficult times when they need the guidance. I often warn them to be careful during good times. That’s when companies tend to get complacent and ignore the red flags.
Whilst you’ve survived many downturns, for many CEOs this will be a first and they’ll be worried about whether they can survive. What advice would you give them?
I just came from a board meeting where we discussed the current economic problems. I advised the company that they had done a fabulous job through the pandemic. However, they shouldn’t consider this economic slowdown to be a problem. It’s here and they should embrace it. What they need to do is figure out how to pivot the direction of the company to take advantage of the inflection point in the market. Use this as a forcing function to modify the product direction and adopt to new opportunities ahead of them. They must focus on implementing changes now so that, in 12 months after the COVID-19 pandemic is over and life gets back to normal, they come out as a more powerful company and better positioned than their competitors.
What advice would you give to companies reading this who want to embrace change and come out of this downturn stronger?
Working from home has become the new norm. It’s not going to get back to where it was before the pandemic. I strongly encourage technology companies to embrace the importance of cloud, 5G, cybersecurity, and online streaming trends because you’re going to lose to this macro industry trend if you don’t.
You also need to figure out how your company can contribute socially, technologically, and change the lives of people for the better. Public and private companies should contribute as much as they can afford towards social causes. I always look at the bigger global picture of one’s existence. We are brought into this world for a short period of time to try and contribute — change it for the better. Touch peoples lives in a meaningful and positive way and leave your legacy.
Whilst the current downturn has been devastating in many respects, it has also presented many social and environmental positives. What are your thoughts on this?
Just as companies have a corporate vision, we all need to have a personal vision. Global leaders need to have a vision of what they want the next five years to look like.
The health pandemic has been devastating. However, there are a few bright spots coming out of this crisis. Cloud technology adoption will accelerate, and productivity is going to increase with adoption of AI. 5G technology implementation will accelerate and healthcare systems are going to change forever because of it. Furthermore, the whole world can use this opportunity to accelerate the trend towards using more ecofriendly renewable energy, so we can continue to breathe clean air. Another positive through this current crisis is that families are spending more time together and building stronger bonds. I hope leaders around the world take this opportunity to look at the positives and emphasize them, rather than go back to life as we knew it before the pandemic.
Despite the downturn, technology continues to rapidly evolve and clearly has to be part of the solution. Where do you see technology heading in the future and where do you see the biggest opportunities right now?
Technology is an integral part of our lives. Every global company needs to use technology to be productive and efficient. The move to cloud from on-premise, adoption of 5G networks for bandwidth, the age of streaming content, use of telemedicine, rapid adoption of autonomous vehicles, the threat of security breaches, brand fraud, and email phishing are all trends that are going to accelerate. These trends offer tremendous opportunities for investment as well as an opportunity to work with amazing entrepreneurs. That really excites me!
Throughout your career, have there have been people who have been key influencers. Any thoughts you would like to share?
I have been extremely lucky to have several amazing people who have influenced my career over the past years. I am going to mention only a few who helped me with major career shifts, though there were many others who have contributed to my success.
It all started with my undergraduate studies at the Indian Institute of Technology, Mumbai, which gave me an incredible education and an opportunity to receive a scholarship to a graduate school in the U.S. I was also influenced positively by some of my close friends in the IIT dorms with whom I spent incredible number of hours over 5 years. Thank you Mayank, Shirish, Janat, and Bhupen for being there for me.
In the early stage of my career, I was lucky to get an opportunity to switch from an engineering role to marketing role. Ajay Shah believed in me and gave me a chance to make this pivotal change from engineering to marketing. Later in my professional career, I owe it to Alex Balkanski, who was the founder of the company and a partner at Benchmark Capital who gave me an opportunity to be the CEO of C-Cube Microsystem, along with Board members Don Valentine, TJ Rogers, and Larry Sonsini. This was a major inflection point and changed my career in a significant way. Rob Chandra gave me an opportunity in a venture role at Bessemer Venture Partners, and later became a great friend and board member on several companies with me.
Last but not the least, the most influential people in my life are my wife, my twin boys, and my close family, friends (you know who you are) and entrepreneurs who always supported me no matter what, even during difficult phases in my life. Without them, I would not be where I am today.
From building microchips in the 1980's tech boom to becoming the CEO of multi-billion-dollar technology companies, there are not many people in the world who can claim to have as long and successful a career as Umesh Padval. Read part 1 of this 3 part interview here: The Inspiring Journey of One of Silicon Valley's Up-And-Coming Startup Investors