Two months ago I came across an ad in the print edition of the Wall Street Journal that struck me as so inspiring that I clipped it and posted it on my refrigerator. The ad shows a golfer standing on a bank, staring down at a ball that landed on an inaccessible rock next to a water hazard. Above the image is a caption that reads: “It’s What You Do Next That Counts.”

It wasn’t the artistic nature of the creative that I found appealing so much as the message that it conveys. With his ball lying in an unapproachable spot, the golfer has seemingly blown it. His score, not just for the hole but perhaps the entire tournament, hangs in balance. But rather than despair or lose his cool, he contemplatively stands there evaluating his next move. He’s neither denying reality nor despairing; instead, he’s evaluating this potential crisis moment and plotting his next move.

I should mention a couple of other details about this advertisement. The ad is for Accenture and the golfer is Tiger Woods, which makes the caption pretty ironic.

By now everyone knows that Tiger Woods is in midst of his own moment of crisis. Following his bizarre Thanksgiving car crash and revelations of multiple affairs, the first athlete ever to surpass $1 billion in career earnings has watched as sponsors pulled his TV ads, Accenture canceled his endorsement deal, and his popularity has tumbled. Just yesterday, word came that one of Tiger’s doctors is being investigated for providing performance enhancing drugs; while there’s nothing to link Tiger to this drug scandal, his handlers must be cringing over this association. Tiger’s response was to announce that he’s taking an indefinite hiatus from the PGA tour in order to focus on his family and attempt to save his marriage.

Clearly Tiger’s double life is reprehensible, and I sympathize with his wife, Elin Nordegren. I’m also grieved to see my former Stanford classmate self-destruct like this. (I didn’t know Tiger well, but we did meet a few times at the Farm—including our first day of classes in 1994, when he informed our Medieval history professor that he’d have to miss a lot of lectures because of his golf obligations.) His family’s future is at stake, so I won’t make light of this situation or offer any trite advice.

However, I do think that these events provide a timely backdrop to reflect on handling a crisis, something that every entrepreneur is sure to encounter at some point in his or her career. Whether it’s cash flow woes, a product problem, the entrance of new competitors, a legal challenge, internal conflicts, customer retention issues, damaging media coverage, or some combination of the above, startups face many potential existential crises on the path to becoming a viable business.

How should you respond when your company faces a moment of crisis? Like the ad says, “It’s What You Do Next That Counts.” Let’s examine a crisis moment from early in PayPal’s existence to glean a basic framework.

Back in the summer of 2000, the company was burning through $10 million a month. We had basically no revenue coming in, while the cost of our users funding transactions with their credit cards was soaring. The board had just made its second CEO change in half a year. In the marketplace, PayPal was facing stiff competition from eBay’s Billpoint, while Yahoo and Citibank were creating online payments services of their own. Meanwhile, PayPal was being attacked daily by foreign mafia, who used the service to siphon money off of stolen credit card numbers. But wait—as the late Billy Mays would say—there’s more. We were also experiencing a customer service meltdown, as hundreds of thousands of inquiries from our growing user base overwhelmed our young company’s ability to respond.

I think that qualifies as a crisis. (Now you probably understand why I titled my book The PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of Planet Earth.) So how did Peter Thiel, David Sacks, and the rest of the management team respond? Let’s take a look, and in the process distill a few principles about managing in the midst of crisis.

1) Identify the problems you’re facing. As both Tiger’s and PayPal’s situations demonstrate, the onset of a crisis can be marked by multiple significant problems coming to a head all at once. I often heard Peter Thiel compare PayPal to a big machine with many inter-dependent levers, pulleys, and dials that needed to be calibrated. This is a useful analogy because it implies that when something is going wrong with the machine, you don’t want to run around randomly turning dials and yanking levers. Instead, you need to step back from the crisis situation and rationally assess the nature of the problems you’re facing; otherwise you could end up making the situation worse.

2) Narrow your focus. Humans generally crave stability, hence we naturally seek to control our circumstances. So when your world is crashing in around you, it’s tempting to rush in and try to fix everything at once in order to regain a sense of control. But in the midst of a crisis, this often isn’t possible, even if you had unlimited resources (which most entrepreneurs do not). So when you’re beset by multiple serious problems, it’s critical to identify which ones are the most important to your business that are also actionable. In the case of PayPal’s crisis, our management team prioritized generating revenue, cracking down on fraud, and improving customer service efficiency as the top priorities. While this didn’t address some critical challenges such as our competitive situation or negative public image, the execs judged that making progress on these issues would stabilize the business and allow us to address the other problems over time.

3) Devise a few key metrics. Intuition is important, but don’t rely on your gut feeling alone—especially when you’re in the midst of a potentially emotional situation. In a crisis, identify and monitor a few key metrics that relate directly to the problems you’ve targeted for action so you can gauge the effectiveness of your efforts. Generally speaking, operational metrics are preferable to financial metrics because you can collect them faster, and they should be closely related to whatever the issue is you’re trying to fix. In PayPal’s hour of crisis, I devised a simple visual metric that tracked our progress on revenue growth; I plotted the % of transactions to fee-bearing accounts (which made us money) vs. the % of transactions funded by credit cards (which cost us money) over an x-axis for time. We knew we had to get the lines to cross in order to make the business model viable. While overly simplified, it was a powerful operational metric that everyone in the company could understand, and to this day former colleagues still mention it to me as something that made an impression on them.

4) Implement a feasible strategic response. Notice I didn’t say “find the perfect solution,” because generally such a thing doesn’t exist in a crisis. The real world is much messier than that, and a state of crisis implies you have a limited amount of time to assess your options. Once you’ve narrowed your focus to your most critical problems and identified metrics to quantify what’s going on, it’s time to map out a feasible way to move the needle. For a company this often means pulling together teams charged with figuring out the details of the strategic effort and then implementing them. At PayPal, I was tasked with running our “upsell team,” which owned the task of migrating the small businesses that were using the service into fee-bearing accounts after they’d enjoyed a free service for most of the year. Our team identified the product changes we needed to make in order to accomplish this, quantified the possible outcome using our key metrics, and then got management’s sign-off to implement the strategy.

5) Be honest with your stakeholders. As your strategic response to the crisis unfolds, it’s critical to communicate clearly with your stakeholders the reason behind the changes being implemented. Depending on the nature of the crisis, your employees, investors, strategic partners, and customers probably have some sense that things aren’t right. Rather than clamming up while you implement your strategic response, communicate with them the reasons behind your actions. Obviously this requires discretion, but an appropriate level of transparency can help stakeholders get behind your changes. At PayPal, I opened up a dialogue with the small businesses (mostly auction sellers) that we were moving into fee-bearing accounts. I tried them a clear sense of what was coming, and made sure they understood this was a necessary decision for the long run viability of our business. The campaign resulted in a 99% conversion rate, and our transaction revenues grew from $1.0 million to $7.4 million in just one quarter.

6) Monitor the results and continue implementing. The end of a crisis is seldom marked by a definitive signal, so it’s critical to keep a close eye on your key metrics as you implement your strategic response. If your metrics don’t improve, it suggests your response isn’t working—or that you haven’t diagnosed the cause-and-effect of the problems correctly. Either way, your metrics are your feedback loop that tell you how your response is impacting the situation, which determines if you can continue on to step #7, or need to go back to step #1.

7) Do a post mortem. It’s important to understand what caused the crisis so you can avoid similar problems in the future, and while you already diagnosed the problems causing the crisis, it’s also critical to revisit this after the crisis has abated. Your perspective on the situation has probably changed once you’re removed from the heat of the moment, and it affords you the luxury of drawing big picture lessons that you can take with you. (Eric Ries offers a useful framework called the “Five Whys” for diagnosing the source of problems and implementing solutions to prevent them from recurring. It’s definitely worth a read—and a bookmark.)

A lot more can be said about this topic, but I think this framework from PayPal’s experience illustrates some basic tools for figuring out how to respond, using logic and data to guide your execution.

In a moment of crisis, what you do next does count. That’s the reason that I’ve chosen to leave Tiger’s ad on my fridge.

This entry was posted on Wednesday, December 16th, 2009 at 6:30 pm and is filed under Entrepreneurship, Startup Advice. You can subscribe via RSS 2.0 feed to this post's comments. You can comment below, or link to this permanent URL from your own site. Your comments will appear immediately, but I reserve the right to delete innapropriate comments.