We wanted to take time to document what has been happening inside RunSignup since the Coronavirus started. We have seen lots of different speculation from all sides – that we are small and therefore will be crushed by far larger competitors to speculation that we have all this money and are stealing from races by having reserves in place. The truth is much more interesting and speaks to the strengths of an employee-owned company that’s focused on helping our customers.
TL;DR We deployed a ton of software to help our race customers meet their financial obligations for chargebacks, and to help them communicate with their participants to provide flexible options starting the week of March 9. We put our entire 48 person company on half time and half pay and cut our total expenses by 60% effective March 13 to give us time to adapt and stretch our cash reserves. We already had a bunch of virtual race software like RaceJoy and a Virtual TXT Bot, experience with virtual races of more than 20,000 participants, and an amazing customer and timer channel that helped ramp the transaction volume of virtual races to about 40% of our typical volume. We also lowered our original reserve requirements after one month of data, and expect further reductions next month. This week we are operating at close to break even because of our cost reductions and the ramp up of virtual races. We also received our PPP loan on Friday, April 17, which will allow our employees to go back to full compensation for 8 weeks. After that they will return to part pay based on what our transactions volume is, and will be adjusted as business grows. In addition to our Coronavirus specific software, we have released a number of nice feature improvements, and will be rolling out significant new technology over the next 3 months that will include a BYO Merchant Account capability for those customers who do not like our reserve policies. And some great new features for GiveSignup. We are also working with over 40 industry leaders to develop a set of guidelines for getting real races running again in the coming months.
In graphics, this is what has happened to us financially. The blue line shows our average daily Gross Profit – how much we have after credit card fees, partner revenue share, AWS and PCI costs. In other words what we have to pay employees and do things like put on Symposiums and Timer Certification Training. The red line shows our costs. Until March 7, we were doing very well (blue line above red line means profit and future investments can be made). You can see how we cut our costs starting March 15 with the 50% pay cut to employees. But you can see how the blue line of Gross profit has tracked the growing transaction volume – much of it from virtual races. This week we will have over $2 Million of virtual race related transaction volume.
Here is our fuller story…
Friday, March 6
Bob reads this article in the NYTimes about a mathematician’s analysis of the virus. He finally “gets” the math and feels far behind the curve of making the needed adjustments that will affect our customers and our company.
There are going to be 3 big problems:
- We have transferred about $75 Million to race organizations for races that are scheduled to happen in the future. Yet the cardholders who made those payments have the right to “chargeback” those payments. How will we facilitate this potential large movement of money?
- Race organizations are going to need clear and simple ways to communicate with their customers, as well as options to offer.
- Our revenue is going to fall drastically and expenses will far outrun what little revenue remains putting the company under serious financial pressure.
Week of March 9
We have an all hands meeting and the company pivots immediately to begin work on the first two issues. It begins a fast moving, hard working, customers yelling at us week…
Reserves to Meet Chargebacks
As a Payment Facilitator, each of our customers has their own merchant bank account balance. Some other registration and ticket companies have a different approach and pool all of the money together in a single pot. We can’t borrow from Race A to pay a chargeback from Race B. This means when there is money on Race A’s account – it is really there. That is nice knowledge to have for races that might have been burned by RacePartner, who borrowed from Peter to pay Paul a few too many times and eventually ran out of delay tactics.
To meet the potential chargeback problem, we institute a reserve requirement of 20% of race registration fees (not donations or memberships) and 10% on payment accounts. We write a bunch of software that gets released in time for the typical big bulge of weekly payments that goes out on Tuesday. This was very important so that we could fill each race’s reserve since each race was liable separately and their reserve account was separate.
Bob wants to do the full 20% immediately because he knows this will be the last week of significant revenue that races will be getting to build a reserve with. Kevin and Bryan argue to do a 50-50 split. So if a race had $1,000 in registrations we give them $500 and put $500 in their reserve. Bob finally agrees, but has doubts.
This of course adds difficulty to the challenge that the development team has in implementing the change. Stephen, Ryan and Matt are up late getting the software done. When payments get released on Tuesday, there is a problem in that not all customers got the 50% hold, most got more than that, which means reserves are built up less than what we thought was prudent at the time.
Of course customers are upset. They have no idea why we would be changing this policy. Bob gets yelled at for 30 minutes by a customer who was certain his events in Washington would never be cancelled and we were holding HIS money. Bob tries to explain that he may not have control over whether his events are held, and that that money is actually cardholders’ money until he delivers what they bought.
Chargeback Education – Just as we had finished educating the endurance community on the wonderful world of sales tax, we take on the equally dismal topic of educating everyone on chargebacks. We begin building tools that will help customers have visibility and reporting on chargebacks and enable them to help by reaching out directly to the participants who made chargebacks to try to get them to reverse the chargebacks.
From a financial perspective, customers were liable for $75 Million of registration fees they had collected and not delivered on. A huge liability. The reserve was meant to help them deal with that risk.
As the underwriter, our experience had always been positive with most races and the relatively low risk of chargebacks. We had a couple of race operators who had gone bankrupt and cancelled their races and we had seen up to 40% chargeback rates.
From a RunSignup perspective, if a race does not have reserves in their merchant bank accounts, then we have to pay it and then go and collect the money from the race. We were concerned that in a worst case scenario maybe half of the races might go bankrupt and their chargeback rate would be 20% – a potential shortfall of $7.5 Million that races who had been paid were potentially sticking RunSignup with the problem.
Well, there has been lots of good news on the reserve and chargeback front over the past month. First, we had customers wire, ACH and do credit card deposits for $Millions to fill their reserves. Large races were wiring us $300K or $250K or $125K, and smaller races who wanted to process refunds proactively were sending us checks for $4,000. To help facilitate the high level of refunds, we waived our standard $1 fee to process a refund and decided to “eat” the cost of processing those to try to help mitigate risk.
Second, most races did an excellent job of communicating with customers and offering options. This led to a much smaller chargeback rate than we had expected. In addition, most participants have been very understanding. We had one large 30,000 person event that is for a nonprofit that had to go virtual. They saw less than 2 dozen chargebacks, and they had additional registrations and donations after the announced they went virtual.
Of course, we have had problems. One race had collected $330K from participants and cancelled their March event. They did not have a reserve and have had dozens of chargebacks that we have had to fund. We are having to spend time aggressively pursuing them. Loaning people money is not our business, nor is taking responsibility for their races and how they treat their customers. We are a technology company, and future moves we make will re-emphasize that.
Bryan has taken a lot of heat for our policies. He has had countless phone calls accusing us of stealing a race’s money. He patiently tries to explain all of the issues outlined above – that it is the cardholder’s money and the race’s responsibility to either give them what they bought or pay it back. And he does this even though he has voluntarily taken no pay for the past 6 weeks, and his own parents have been sick with coronavirus.
This past week we announced that our reserve requirements are dropping to 10% for races and 5% for payment accounts. We are likely to make another drop in May as we gather more data and life returns more to the “new normal”. We are also working hard on a “BYO” payment account option, that will let races bring their own merchant account if they do not like our policies.
Postponement / Cancellation Tools
The other thing we did during that first week was begin to build out a series of postponement and cancellation tools. We had initial releases by Wednesday, and have continued to build them out over the past month with lots of new features for deferment, refunds, emails, cover pages and more.
As noted above, most races have done an extraordinary job communicating with their participants. And we are seeing signs of great creativity.
Half Pay / Half Time
On Friday, March 13, Bob had a company virtual meeting and told everyone that we were all on half time and half pay beginning immediately. Some of the executives actually went to no pay.
As the chart up near the top of this long blog shows, that was key in giving the company precious time. We had financial reserves, but the longer we could make them last, the more information we would know and the better decisions we could make.
Some companies like Eventbrite and Toast chose to furlough 50% of their employees. We chose this different path partly because of previous experiences Bob had and partly because we are an employee-owned company and each person is valued here. Bob’s father was an IBM’er starting in the 60’s. Bob had a summer job at IBM during college and learned the legacy of IBM’s (at the time) no layoff policy. Tom Watson had made that decision during the Great Depression and continued to manufacture calculating machines. When the social security administration was created in the 30’s, IBM was the only company with the staff, inventory and manufacturing facilities to fulfill the need. Bob also saw how HP went to a 90% pay rate and Friday afternoons off during a recession in the 80’s. We have a firm belief that the endurance industry will come back some day and we will need every employee we have and more. And our customers will continue to need new technology solutions and great people to help them implement that technology.
Our team has been amazing. Even though everyone is working at half pay, we have been widely complimented for putting out the best technology, providing the best information, and being the most open about what is really happening. The reality is that while we told people half pay and half time, many have been working double time.
The other thing that happened is that everyone went into a mode to try to help find solutions. They shared how to best get a reprieve from mortgage, car, and student loan payments. They shared “side hustles” to make a bit of money. How to apply for unemployment since in many states getting put on half time made a number of people eligible.
As we have discussed many times, we are an employee-owned company. Bob supplied the capital to get us this far. We normally operate marginally profitably, pouring all of our money back into creating more technology and helping to educate customers. We do a profit sharing bonus, so if we do make a profit our employees are direct beneficiaries.
As stated above, when this first broke, we estimated that we might have a need of capital as high as $7.5 Million to cover the lack of race reserves – and recovering that money was going to be costly (as that one example above is proving). Our big risk was the unknown of chargebacks. We made the immediate decision to cut expenses – and with the 50% pay cut and not holding the Symposium this summer and cutting all travel and some other costs (including probably no profit sharing this year), we cut our expenses by roughly 60% by March 13. We had plenty of reserves, and Bob was willing to put additional money into the company for normal operations. Without the chargeback risk, we felt we could hold out until revenues started creeping back up.
But with the chargeback risk, we started to look at potential sources of outsize capital. There were several different sources, and none of them were great. We could do a “Friends & Family” round – but they might not be our friends and family afterward.
Bob typically gets a call a week from Private Equity to sell the company. So we went back to that collection of companies. While there was interest, no one wanted to “catch a falling knife”. There was too much uncertainty. For the risk, they wanted too much control and ownership for not enough in return. In some cases, it could have put the company at more risk to take the money.
Another potential solution was to combine with a competitor. This presented a number of issues of overhead of trying to combine technology stacks, figuring out who stays and who is “redundant”, figuring out the financing, etc. In addition, Bob has a natural aversion to becoming a small part of a big company. When HP acquired Bluestone in 2001 they wanted to get more into software. A year later as the recession wore on, they decided to go back to their roots and close the software operation and refocus on hardware. So going to one of those companies presented risks.
Another solution was to take on debt. There was a payment processing company backed by a private equity company willing to give us debt if we moved our processing. The problem with that one was the high cost of the money, some marginal loss of control and getting locked into a long term payment processing contract that would not give us the cost advantages we were seeking to build a strong business in the long term.
There was one similarity across all of these. In the beginning there was a ton of unknown. Which made them more hesitant and us more open to doing something. In fact, Bob talked with most of them openly about the fact that the longer it took to reach agreement, the more likely one side or the other would walk away based on what the data provided.
The good news for RunSignup, and we think for our customers, is that we found out that our chargeback risk was “only” going to be about $250,000 – $750,000 in total. Not the $7.5M we were fearing. And this was a level we could deal with between the company’s assets and Bob’s ability to put more money into the company.
And then our decision became even easier…
Paycheck Protection Program
The government rolled out PPP to help businesses exactly like RunSignup. At 48 employees, we were well under the 500 limit. We had obviously been severely impacted. Our objective was to keep our employees employed.
Kevin worked hard with our bank – TDBank and a wonderful loan officer, Carl Willers. TDBank, like most large banks, was not up and running on April 3. However, we were well prepared when they did open. Kevin sweated through a 2.5 hour process of filling everything out when the system opened on April 6. We waited anxiously getting partial details along the way that made us hopeful we would get it.
On Friday, April 17, the money was deposited in our bank account. This will allow us to return all employees back to 100% compensation for the next 8 weeks. This will give them all time to hopefully build some of their own personal reserves.
After that 8 week period, we intend to return to a % of pay based on the previous 4 weeks of gross profit. We intend to run on a near break even basis. If gross profit is at 50%, then pay will be at 50%. If it is at 75%, then pay will increase to that.
Virtual Races have been the source of most of our customers’ revenue the past month. There has been a wholesale shift to accept virtual races – either stand alone or as an alternative to traditional races. We have announced a new website resource – RunSignup.com/GoVirtual.
In our Weekly Reports, we show that Week 7 was at 35% of last year’s transaction volume, and we expect Week 8 to be over 40%. Most of this is virtual races. This week, RunSignup will process over $2 Million in transactions for virtual races. This revenue is enabling many race organizations and timers to make ends meet during this trying time.
Getting Back to the “New Normal”
We are moving into a new phase in our country. The first was denial that COVID-19 posed a threat to the United States. The second was acceptance of the situation and an accompanying feeling of helplessness. We are now starting to move into a third phase. The topic of when and how things open up again is becoming the dominant topic rather than death rate and overwhelmed hospitals.
Each local community has a desire to reopen and find their own new normal in safe ways. If the endurance industry can develop sound practices based on local health guidelines, we have a chance to be one of the first ways that communities can regather – at safe social distances.
The endurance community is made up of tens of thousands of micro communities – races, clubs, stores, timers, nonprofits, race organizations, sponsors, volunteers and more. This diversity brings strength to our community because passion drives much of the efforts to put on races. These communities are spread across this huge country and have access to amazing resources.
The diversity will result in creative ideas. Our industry’s sense of community will help spread ideas that make sense and work. Just as races have rapidly adapted to virtual events over the past weeks, races will learn how to put on safe events and allow the micro communities putting on those races to regain momentum.
We are working with a large group of experts to create a living document to provide ideas for a suggested path forward for races in the post-coronavirus environment that different groups in the endurance industry can tailor for their specific location and needs. We will be publishing the first version of that document this coming week. We hope it helps races get back to the new normal more quickly.
Make Money and Save Money
RunSignup is also moving into a new phase. When we talk with customers, we realize that our technology can help them with two fundamental questions – How do we make money? and How do we save money? We think these questions are going to be more important than ever as our industry begins to take early steps towards putting on races again in the “new normal”. We’re optimistic about all of the opportunity our industry has to bring communities together in healthy ways, and confident in our ability to help our customers do exactly that through our technology that saves them money and makes them money.
We are a technology company, and that technology is here to help customers do just that. We will continue to work hard to build and deliver solid technology backed with the expertise and passion to help our customers adapt and get back on track.