Eric Ashman – Innovation Accounting and Surviving a Crisis

Eric Ashman – Innovation Accounting and Surviving a Crisis

Eric Ashman is the founder of Bothered Mind Advisors and a member of the advisory board of EforAll Roxbury. Previously, Ashman served as the President of Group Nine Media, one of the world’s largest digital-first media companies, the President and CFO of Thrillist Media Group, and the CFO of The Huffington Post up through the sale of the company to AOL in 2011. Ashman was also an advisor to Lerer Hippeau Ventures and has taught as an adjunct professor at NYU.

Joining Thrillist as CFO in 2011, Ashman went on to lead the company through its Series A and Series B rounds, raising a combined $67 million. He also played a key role in spinning out the JackThreads commerce business ahead of creating Group Nine.

Alongside being a seasoned business builder, Ashman is a passionate job creator – during his tenure, Thrillist grew from a 50-person email newsletter business to become the cornerstone of a digital media company with over 600 people.

Eric Ashman also played an instrumental role in the sale of The Huffington Post, where he was Chief Financial Officer, to AOL for $315 million in 2011.

Ashman received his BBA in Accounting from the Isenberg School of Management at the University of Massachusetts in Amherst, MA and became a Certified Public Accountant in 1993. He has also spent time as an adjunct professor at the NYU School of Publishing.

When he’s not working, Ashman likes to spend time skiing and backpacking with his wife and two children.

We had the opportunity to sit down and talk to Eric Ashman about innovation accounting and its relevancy to startups especially during the current global health crisis, which has hit small businesses and startup companies especially hard.

What is innovation accounting?

Innovation accounting is a really great Lean Startup concept that every startup should understand and incorporate into their daily execution.

A startup is not a company. A startup is like a laboratory. You’ve got this hypothesis and you have this idea of a product that’s going to hit a certain market need, and you’re going to sell it for a certain amount of money, and you have an idea as to how you’re going to go to market. It’s all of these assumptions and hypotheses that you have. And then you launch it. You start to get data. And some of it’s probably really good, and some of it’s probably really bad because your initial assumptions are just that, an assumption. And it’s okay if some of them are wrong, that’s why we’re doing this.

And so you get some data, you compare it to your first assumptions of KPIs, which was to your first revenue model and your income model. And you thought you were going to launch this product and you’d make a $100,000 a month, after month number two, and it would generate all this cash. And quickly you realize that none of those KPIs are holding, and so your assumptions start to change. And so you learn, you adjust your go-to-market strategy, you tweak the product a little bit. And over time, if you go through this cycle fast enough and often enough, your hope is that ultimately you will build a company that is scalable and profitable, that can generate cash.

You should be able to get through this cycle really quickly, think in terms of two to four weeks sprints through the cycle, where you can iterate, test, get data, adjust, start again. Speed and agility is really important because you don’t have a lot of time before you run out of cash. Your goal is to get profitable, scalable, or if you’re on the venture capital track, to fundraise again before you run out of money. You have to get through the cycle and find that product market fit and scalability before it’s too late.

In times of massive, rapid disruption, such as Covid, using the Innovation Accounting framework can also help you to potentially explore new sales channels and business models. As difficult as the past year has been, this is also a moment of great disruption, and with great disruption comes new opportunities.

I think there’s going to be real fixed behavioral change on the consumer and the business side. And the question becomes, what is that mean? And what does that look like when we all get to come back outside and shop again? What does that look like as people go back into their offices? Is it going to be exactly the same, or are we going to create meaningful behavior shifts here? And how does that impact the way you think about your startup? And how can you use this time to start experiments, because that’s all the startup really is anyway, around potentially new paths to new drivers, new channels, new product ideas, new markets that you may not have been thinking about in the very beginning.

And so the innovation accounting cycle, it’s always relevant.

So what do you do now?

You’ve got to get yourself in a point where you get out of a defensive crouch and you start looking for new opportunities because the landscape’s going to change. OThis is true, regardless of whether times are great or times are bad, because even in really good times, startups all the time find that their runway is shorter than they expected, and many things are going as planned.

Startups are constantly getting into situations where a lot of what they were trying isn’t working and they have to stop and pull back. And the number one reason that I find why founders do not make the hard decisions is mental and that they don’t want to disappoint people, and they don’t want to be wrong, and they don’t want to let people down. They don’t want to tell their employees that the last two years of work was taking them down the wrong path. They don’t want to tell their engineering team that the platform that they built, nobody wants it, and they have to start all over. They certainly don’t want to disappoint their board, their investors, their family, or their friends.

When we talk about the founder mental health and the challenges of being a founder, I think this is a really big part of it. We spend a lot of our times basically creating a wall of bravado around us, because you need that to push forward. Breaking that wall back down when you have to make hard decisions is really, really difficult.

So beyond anything else, you need to push your way through this. And I will say that my go-to move to get through emotion is the cash flow. There’s nothing that can drive you to action faster than staring at a cash flow that is your best guess estimation of where the business is going, that tells you that you only have six months of cash. So ground yourself back in your financial model and your cash flow and your runway, and be honest about it. And run these scenarios and give yourself a clear sense of what you’re going to need to do to keep your startup alive because your number one job is to keep your company alive and come out the other side of this and give yourself a chance to execute and innovate again.

What steps can you take to extend your runway and survive in a crisis?

I want to take you through how I think about what you need to do to pull back and how do you extend your runway and lower your cash burn. And what I always tell folks is, it’s not by cutting 10% across the board. It’s not by going through line by line and trying to reduce expenses, it’s a really difficult process, it never gets you to where you need to get to.. You need to identify the stop-doing work and avoid this concept of death by a thousand cuts.

When I talk about stop-doing work, what I’m talking about is, first and foremost, pulling back on inefficient marketing spend. I don’t care if you’re spending $500 a month or $500,000 a month, when you’re ramping into growth, some piece of that is far less efficient than the core of your marketing expenditures.

When you first launch your company, you start spending on customer acquisition, and if you’re doing it right, you’re hitting your most loyal, passionate cohort of users. They’re super-efficient to acquire. And then as you start to scale, every additional layer of your marketing expense tends to get a little bit less efficient. And then you blend it all together to make the math work, and that’s fine in good times, to a degree. But in a crisis, you can’t afford inefficient marketing spend.

One of the founders I was recently advising tripled the return on ad spend by cutting their marketing by 65%. Their return on ad spend went up by 3x, which basically means their payback period is coming from 18 months to about nine. And we want to get that payback period in well under a year because we don’t have 18 months of cash left. So you want to really focus on your marketing spend, it’s the thing that tends to get ramped the fastest. And it’s the quickest thing that you can pull back and get your payback period into a really tight window.

Connected to the concept of inefficient marketing spend is identifying unprofitable sales channels. And again, it could just be that you have two sales channels, maybe it’s online, offline, maybe it’s B2B and B2C, whatever it is, every initiative, it’s not just dollars, it’s resources, it’s people’s time. So look at those unprofitable, unproductive sales channels right now. You might not have time or money to fully develop them right now. And so, you might be pulling them down.

Finally, find the unproductive initiatives.  As a founder, you will be surprised at the number of initiatives that are going on in your company that you’re not even aware of. Whether you’ve ramped unproductive initiatives or other people have, you’ll be surprised at what’s going on within your company. And now it’s going to be a time when you need to pull these things back.

Be honest about unprofitable products. You started with one awesome idea and on the back of that you launched three pretty good ideas, and on the back of that four mediocre ideas. And you were hoping they would come around but right now you don’t have the time for that. So you might need to ramp back and scale back to the bread and butter, what’s profitable today, and what people really want right now.

You need to move quickly. At the moment in time that you decide that it’s time for a dramatic pullback within your company to pull back spend and give yourself more cash and more time, there is one important dynamic that is working against you. People within your organization will quickly become aware that change is coming, and it can create all kinds of very strange behaviors because people get scared.

You’ll see it start to filter through and people will start to protect the things that they care about and what they think is important. People will get scared and nervous. You need to move quickly. Your job as the CEO, as the founder, is to push the organization to make fast decisions and get past the process as fast as you can because you’ve got to get people back on a more productive, proactive footing, and get them out of a defensive crouch.