Not all of them. Just the ones you don't need. Recently, insurers State Farm and Allstate demonstrated how that's done by dumping longstanding clients in California. Love'em when they're profitable; leave'em when they're not.
BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH INVESTORS@TULLMAN
Mark
Twain said that a banker is a fellow who lends you his umbrella when the sun is
shining but wants it back the minute it begins to rain. I'd say his view was a
little narrow, since plenty of investors are certainly charter members of the
same unreliable club. The overnight run on Silicon Valley Bank and that
institution's ultimate collapse -- which most of us believe was driven by the panic
of a few key, well-connected, and cowardly VCs with social media megaphones --
is just one of the latest cases in point. As my old friend and mentor Bill
McGowan, the founder of MCI, used to say: These guys have great loyalty to
their businesses, but their No. 1 loyalty is to their own tush. When the heat
is on, they're hard to find and you'd be a fool to depend on them.
And
the heat is on, literally, as well as the water, which is why State Farm and
Allstate are abandoning the California market for homeowners’ insurance. You're
apparently no longer in good hands and it's not exactly neighborly, but if you
live in the land of wildfires, floods, and mudslides, you're really up a creek.
We've
all experienced versions of the disappointment of fair-weather friends, in both
our business and personal lives. They're there cheering you on in the good
times but bail the moment that the going gets rough. They have wishbones where
you thought they had backbones and they disappear without a trace when you
really need them most. And then -- down the line and after the fact -- the ones
who utterly lack the courage to contribute always seem to find an explanation
to justify their cowardice. If you really want to do something, you'll find a
way; if you don't, you'll find an excuse.
This
painful recurrence is part of every entrepreneur's journey. Where there's
always an uphill part of the path, where promises that seemed so solid go up in
smoke, and where sometimes you feel that you can't tell your courage from your
desperation. They should print t-shirts saying something like: "count on
self-interest, not self-sacrifice, and you'll never be surprised" along
with the rest of each startup's swag. No one enjoys the process when friends
and even family flee, and the pain and heartbreak don't get any better when
you've been part of that particular movie too many times yourself.
But
there are unavoidable times when the shoe is on the other foot - where you've
got to disappoint people and leave them hanging. Then it's your job to break
the hard news to some of your own customers that some changes are necessary and
that it may even be time for you to part ways entirely. Especially these days,
you're going to have to get ready to say
"No" and it won't be easy. Not easy or simple, but
simply necessary. The reality is that you're not required to burn down your own
business just because you feel the need to be a good sport and try to be there
for everyone else.
And,
as the triage begins, you're going to need to carefully pick and choose which
clients, customers, partners, and vendors you can stick with and help, and
which are going to have to be "fired," because these choices will
ultimately determine the course of your own firm. There are some basic rules in
these cases that can help, but in the final analysis, the process is very often
seat-of-the-pants. These discussions turn out to be far more emotional and
confrontational than you would imagine and there's often a lot of sad and
bitter talk about loyalty, values, and trust.
That's
why it been very interesting to watch as both State Farm and Allstate have
announced that after decades of doing business in California and making
boatloads of bucks as the economy and the population there dramatically
expanded, they've both decided (separately, I'm sure) to stop writing any new
homeowners insurance policies in the state.
They
have plenty of explanations and justifications - climate change and associated
weather risks, higher repair and material costs, increasingly challenging
regulations, overbuilt and insecure geographies -- but the real bottom line is
that they have no loyalties, customer commitment, or empathy. They only have
"interests" and for now at least they're no longer interested in
insuring California homeowners. Love'em when the dollars are there and leave'em
in the lurch when things go south. It may feel painfully personal to you, but
it's just business to them. And don't think that because the big guys have
moved on you can expect to see a herd of other insurers rushing in to fill the
void. Quite the opposite: they'll get out of town just as quickly as they can.
They have about as much courage as the last tackler jumping on the pile in a
football game.
Commercial
real estate is next. This has serious implications not simply for downtown
skyscrapers, but also for strip malls and smaller buildings nationwide, which
house many startups and SMBs. Borrowers, and especially smaller businesses that
have taken loan renewals and rollovers absolutely for granted for years as
they've been loyal and regularly paying customers, are about to get some very
rude awakenings when their loans are pulled, accelerated, or not renewed. These
situations are a lot like pouring too much cream in your coffee. Easy to do,
hard to undo.
When
the prime borrowers collapse and the banks grudgingly have to take over these
properties, you can bet that basic tenant services, ongoing maintenance, and
promotional support will all take a huge hit. Needless to say, in the
midst of all the crap we've gone through over the last three years, having to
quickly repay a line of credit or retire some revolving debt (or having to
quickly relocate from a mall or a building that's falling apart around you)
couldn't come at a worst possible time especially when any spare funds you
might have had were going to be critical to bridging any remaining revenue or
inventory gaps as the economy started to grow again and customers returned.
And
it's not like there are a bunch of other banks waiting in the wings to offer
you some alternatives. If you sensed that draw requests, fundings, and
paperwork processes were slowing down before, these days you're looking at a
timeframe between forever and never. Even the biggest banks such as Chase are
slowly and steadily (and somewhat stealthily) stepping away from their
commercial real estate portfolios and hoping at the same time that they'll get
out of most of their positions, even with a haircut, before the true deluge
begins. The people running these operations may have virtues, but courage is
not one of them. They may be smart, but they're scared as well. Staying the
course and partnering with longtime clients and customers isn't the kind of
risks that make sense today for middle managers who are frankly worrying about
their own positions as well.
There
are no easy answers, and the current financial climate is unlikely to improve
for another year or so as the waves of cancelations, foreclosures,
repossessions, and shutterings rise, crest, and hopefully start to subside by
next fall. In the meantime, the smartest and safest things to do are fairly
simply: conserve and save your cash, don't rely on renewals or new borrowing,
hunker down and don't make any big financial bets at this point, and hope that
the MAGAts in Congress don't make things much worse.