Lessons from Recessions Past

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When the Great Recession hit in late 2007, the marijuana industry showed little resemblance to what it is today, with only a few cannabis businesses operating now that were open then. Today, thousands of growers, retailers, manufacturers and ancillary companies operate across more than 30 states—and they now confront a major economic downturn.

For many in the cannabis industry, this might be the first recession they’ve faced as an executive—or even as a professional. Steering a company or business unit through any recession is daunting, especially one of this magnitude.

Nevertheless, past recessions can offer lessons for how to cope. To that end, Marijuana Business Magazine assembled a quartet of cannabis executives who have weathered the nation’s past three recessions:

  • The savings and loan crisis of 1990-91.
  • The dot-com bust of 2001.
  • The subprime mortgage debacle of 2007-09.

These four executives share lessons they learned from previous recessions and how they are applying them to the current downturn.

 


Pam Marrone

Founder and CEO, Marrone Bio Innovations, Davis, California

 As head of Monsanto’s Insect Biology Group in the 1980s, Marrone pioneered the field of biopesticides and leveraged that experience to become a serial entrepreneur. Lessons she’s learned from the past three recessions include:

  • Raise more money than you need during good times and don’t worry about dilution.
  • Investors who have lived through recessions will better understand your challenges than those who haven’t.
  • Executives and managers need to take salary reductions.
  • Balance cuts and growth opportunities.

Marrone started her own biopesticide company, Entotech, in early 1990 under parent Novo-Nordisk. A few months later, the nation fell into a recession, but Entotech was unaffected because food prices remained high and farmers kept buying its products.

Averting disaster wasn’t so easy in 2001, when Marrone was CEO of AgraQuest, a biopesticide company later acquired by Bayer for nearly $500 million.

“A Silicon Valley investor in AgraQuest said, ‘Plan for disaster. You just don’t know what’ll happen,’” Marrone remembered. She was left to wondering, “What’s going to happen?”

What happened was 9/11, just a few days after Marrone landed in New York City for the start of AgraQuest’s IPO roadshow.

 

Raise Money in Good Times, Dilution Be Damned

Consequently, Marrone, who built the company in anticipation of $50 million in proceeds, couldn’t close the offering and had to quickly cut costs. Simultaneously, venture capital markets “slammed shut,” forcing AgraQuest to compete with dozens of other companies for capital.

“You’re at the mercy of those giving you the money, and then you don’t get the best terms,” Marrone said. “In the good times, you want to raise more money than you need and not worry about dilution because you need it to weather.”

But raising money is often easier said than done—especially if investors are worried about dilution. Winning those battles is likelier if investors have been through a recession.

“Money coming from those who have gone through tough times and who’ve built businesses is often more forgiving than from those who have never been through it,” Marrone said.

 

Balancing Cuts and Growth

Experienced investors also are more likely to understand that abandoning future growth opportunities can be imprudent.

For example, after 9/11, some AgraQuest board members wanted to forgo European expansion plans. Marrone argued they were at the “cusp” of European revenues and pulling back would be “penny-wise and pound-foolish.”

“You don’t want to cut the long-term prospects of the company. But, on the other hand, you have to live to see another day,” she said. “It’s a really difficult balance.”

To convince resistant board members about pursuing revenue in Europe, Marrone reminded them that venture capital stakeholders in the company would need an exit at some point. As it turned out, the AgraQuest product Serenade became a leading biofungicide that later netted the company millions of dollars in revenue.

Marrone made cuts after 9/11, too. For example, she significantly reduced the marketing department and resorted to marketing “on the cheap.” She also asked AgraQuest’s upper-management team to take 10% pay cuts, although they all refused except for the chief financial officer.

 

Lessons Applied in 2007 and 2020

As CEO of Marrone Bio Innovations, which she founded in 2006, Marrone has applied the lessons she learned from previous downturns.

For example, she raised money during good times, including a Series A round in 2007, just before the market collapsed. “I would have gotten much worse terms—and maybe not even been able to raise” later—plus a 2013 IPO followed by several funding rounds.

Marrone is still selective about where she chooses to cut expenses. While many companies cut research and development budgets during recessions, she said only about 20% of her R&D budget goes to new product development while the rest goes to mandatory product safety, quality and manufacturing support. She also credits the R&D team for improving Marrone Bio’s operating efficiencies and taking the company from negative margins to margins of 58% since 2015.

“You have to look at what is essential and what is going to generate near-term cash from sales at a good margin,” she said. “What are you going to reduce without harming future growth? Because investors—this is in cannabis as well—they want to see a big, high-growth company.”

In response to board demands, Marrone cut 10% of her company’s budget. She did this by reducing senior executives’ salaries by 10% and replacing the difference with restricted stock units (RSUs). Bonuses for the top two management tiers—typically paid half in cash and half in RSUs—were paid all in RSUs, while pay increases were frozen throughout the company.

Marrone is better positioned than in recessions past, but she’s still concerned because commodity prices are down and farm bankruptcies are up, although she said sales to cannabis clients
remain steady.

“You just in general have to plan for disaster, which means raise money when you don’t need it,” Marrone said. “Get as much as you can.”

 


Ed Schmults

CEO, Calyx Peak, Foxborough, Massachusetts

This is Ed Schmults’ fourth recession, and while it might be more staggering than the previous three, thus far it has been the easiest to weather. Why? Because cannabis has so far proved to be recession-resistant, while products from his previous businesses were not.

Still, lessons from those earlier struggles inform Schmults’ decision-making today. For example:

  • Inspire confidence in employees and firmly set company direction.
  • Have a plan for moving inventory and streamline operations.
  • Capital is critical to moving forward.

 

Decisive Leadership

Consider Patagonia, the outdoor clothing retailer where Schmults was a business analyst when recession hit in 1990.

“Our planning had expected rosy season after season, and all of the sudden, it flattened out. The company just hit a wall,” Schmults recalled. “We didn’t see it coming, and the company was unprepared for it.”

Patagonia’s bank at the time, Security Pacific (which was bought by Bank of America in 1992), pulled Patagonia’s credit line. About 30% of Patagonia’s employees were laid off—including the entire C-suite team.

The company ushered Kristine McDivitt, a previous CEO who was still with the retailer but in a different executive post, back into the chief executive’s office, where she rallied the remaining staff.

“I’ll never forget the first meeting,” Schmults said, recalling how McDivitt called about eight leaders into a conference room “and just gave this unbelievable, inspiring speech … went around and said, ‘I want you to do this, and I want you to do this.’”

The lesson for executives: “You set the direction,” Schmults said. “If she told me, ‘Jump out that window.’ Boom, I was gone.”

“There’s the old adage, ‘don’t waste a crisis.’ The opportunity to rethink how to conduct business more effectively resulted in a healthier company coming out the other side,” Schmults said.

 

Improving Operations

Schmults emphasizes that while the human toll recessions take are never a good thing, downturns do offer opportunity for improvement. In 2007, he was in a similar situation as CEO of the iconic toy store FAO Schwarz when the subprime mortgage crisis occurred.

“I can point to the day: Oct. 30, our sales just fell off a cliff. I was also on the board of REI at that time, and the same thing happened to them. Those financial executives were our core customer, and they just got crushed,” Schmults recalled. “We suspected that the business was going to get tougher but not quite so abruptly.”

Nearly two decades later, Schmults had to do what his leaders at Patagonia had done, but in a much more difficult downturn.

“You have to get out from under your inventory burden and you have to reduce costs, which sadly involved layoffs,” he said. “I think the one lesson is always do more than you think you need. If you do it piecemeal, it’s just brutal for everybody involved.”

Another step is looking at supply relationships and bidding out costly contracts to make sure you get the best value. “When business is good, you don’t address a lot of those important, day-in, day-out aspects,” he said.

At FAO Schwarz, that meant assessing which vendors were making the most money per square foot of the store and whether the company’s transaction technology was the best fit for the company’s needs.

 

Capital Critical

Schmults was confident enough in his measures and the resulting plan that he offered to buy FAO Schwarz from its investors, whom he said eagerly accepted the idea. But after speaking with more than 50 investor groups, Schmults couldn’t raise enough money to buy the store.

“Nobody was investing in anything—it’s kind of similar to now,” he said.

While cannabis is performing better than toys and apparel, the current downturn has Schmults thinking about those earlier lessons.

“You’ve got to think about landlords, about your customers. Do they have jobs? Are they going to be cutting back? This may not hit cannabis until June or July—or manifest itself in a very different way.”

And even if sales stay solid, investor capital has dried up, Schmults said.

“All of our expansion plans require capital,” Schmults said. “In terms of maintaining the ship, continuing sales will do it. But in terms of expansion plans … you can’t do that just with sales. You need investors, you need capital.”

 

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