This week we welcome a Notice of Appearance by Evan Hengel, a Managing Director in the sunny Los Angeles office of Berkeley Research Group LLC. We edited the dialogue lightly for content and length. Enjoy.
PETITION: You're located in the entertainment capital of the world. What is your assessment of distress in TMT today? What may we expect in the next 6-9 months?
Looking at the local LA entertainment scene (to address the broader TMT market would require more space), further studio consolidation (e.g. Disney/21st Century Fox) could put the next tier of industry participants in a tough position, as they’ve already struggled to adapt to a theatrical release schedule that is organized around fewer tentpoles. That said, with the number of new expensive series (I hesitate to call it TV) being green lit, concerns of a “content bubble” in the near term are probably overblown, as the appetite for that content appears to remain insatiable, even if it’s shifting from theaters to the home. The more interesting story may be the role of tax incentives in the geography of movie/TV production. Other states are obviously hungry for a piece of the industry (hello, Georgia and Louisiana), and foreign countries have not been shy either (a 32% tax rebate may have played a role in the decision to shoot The Last Jedi in Ireland, for example). The recent renewal of California’s own tax credit program will help slow the exodus of work, but there’s no denying the trend toward industry decentralization.
PETITION: Unbeknownst to many, LA has one of the top tech ecosystems in the country now. We write a lot about "#BustedTech" in PETITION. As an operational advisor, what is one piece of advice you'd give early stage startups to ensure that they're setting themselves up for operational success down the road?
I’d advise early stage founders to do everything possible to keep more cash than you think you need. As we also see on the other side of disruption, horrific business decisions are often made not out of incompetence, but rather due to a lack of liquidity/options. Trying to negotiate bridge financing between rounds is tough to do when the people on the other side of the table know you’re low on alternatives, and it’s near impossible to make the right long-term strategic decisions/investments when you’re worried about making payroll next week. Also, hire people who are good at what you aren’t. A spitting image of yourself may grab your attention (we’re all prone to vanity) but won’t add new skills to your company.
PETITION: Your firm tends to do a lot in retail. What is one thing that retail management teams continue to get wrong despite all of the hyper-focus on the area today?
One thing we often still see is a failure to amend merchandising plans to reflect realistic expectations of traffic and conversion. The effect of the resulting glut of inventory is both immediate and long term…margins deteriorating as excess goods are then shoved through discount channels, which in turn hurts the long-term perception of the brand in consumers’ eyes (nobody wants to see their prized $750 jacket being sold at an off-price retailer next week for 60 percent less). Committing to a lean purchasing plan is difficult, as it often requires you to admit that tough times loom ahead, but the risk of not doing so is immense. Being realistic about demand (and the brick-and-mortar footprint needed to meet that demand) will be a key differentiating factor in who will survive the current period of disruption intact. Those who can hold back meaningful allocations of certain products at the distribution center to assess where it should be deployed at maximum margin get bonus points for reducing discount-dependency to clear inventory, but the road to get there has a lot of potholes.
PETITION: What is the best book you’ve read that’s helped guide you in your career?
Reading The Lords of Strategy by Walter Kiechel gave me a helpful sense of history regarding the consulting world. It’s easy to step in to this field and think of it as relatively static, but when you go back in time, it’s actually changed fairly quickly relative to other professional disciplines. The types of work that consultants were engaged in during a given decade are often unrecognizable when compared to the decade prior. Shining that light on restructuring advisory specifically (a fairly minor subset of the larger community), becoming an expert at 13-week cash forecasts and lease rejection analyses may keep you around in the immediate future, but long-term success will be enjoyed by those who push boundaries and identify what executive teams and stakeholders really want from their advisors that they aren’t already getting (and may not even know that they want yet).