If you’re anything like me, you’ve heard enough about the dismal macroeconomic outlook and the need to hunker down and simply survive so you can live to fight another day. How depressing.
Look, there’s no doubt we’re going to go through some stuff over the next year or two, and focusing on preserving cash is, of course, solid advice. That said, there is not nearly enough focus on the opportunities that a downturn can create for entrepreneurs. I also understand many of you are fed up with getting VC advice on a downturn… especially when they are on vacation. Well, I am not on vacation and I too am sweating this out, side by side with some of my portfolio companies. So, let’s put out the cigarette, put away the scotch, and get some positive opportunity vibes flowing.
I was at a company called edocs from 1999-2005 and had a front-row seat to what it took to survive a historical downturn in the tech ecosystem. We had to cancel our plans to go public, but we had a great leadership team that learned together how to reshape a business in tough times and turn it into something lasting as the economy improved. In 2009, I started working with the same founder as we co-founded Paydiant, right on the heels of the second biggest market correction in my life. Downturns are an exceptional time to build a business. You are forced into good habits from day one, and when the lights come back on, you’re a step ahead of everyone who had their head in the sand.
The following are a bunch of thoughts that might help you reframe how you look at this next year or two. As they say, take what you will and leave the rest.
You Don’t Need to be Fast, Just Faster
There’s an old joke about two guys on safari. One is wearing hiking boots and the other is wearing running shoes in case they get attacked by a lion.
Hiking-boot-guy says “Running shoes? That won’t help you outrun a lion.”
Running-shoe-guy says, “I only need to outrun you!”
The lion is the economy. Your competitors are in hiking boots, and you need some running shoes.
In markets like this, almost every company slows down. Hiring slows, projects get postponed, layoffs disrupt teams and culture, customers get frustrated, and so on. Being big or having raised tons of money doesn’t protect them. In fact, it often makes it worse. Big companies – especially companies wearing hiking boots that scaled too fast on the back of huge rounds of capital – have tons of people, projects, complexity, and, importantly, market expectations. Decision-making in a down market is very challenging for large companies and very few can focus the way a focused startup can. Now is your chance to make them pay.
Your running shoes are your ability to focus on the one (or very few) things that address real customer pain, execute on it as quickly as possible, and sprint out in front of the lumbering giants trying to keep all their balls in the air or all their employees from quitting. Your nimble team of rock stars can run circles around any competitor if you pick the right few things to focus on. If you do that, when the rest of the world is slowing down, you can move faster – even with a smaller team. It may not be as fast as you want, but you only need to be faster than hiking-boots-guy.
Growth at All Costs is so 2021
It doesn’t take a genius to hire 100 engineers to build more software faster. Instead, you should be investing your existing resources in building the products your customers want most, and, importantly, are willing to pay the most for. Solve for your biggest customer pain points (especially if you can save them money) and go deep into those few critical capabilities.
As a career product manager, I often tell others that the hardest thing in Product Management is deciding what NOT to do. It’s never been more true than right now. The opportunity here is to simplify and focus on the pursuit of product market fit instead of spraying and praying.
By the same token, spending a fortune on digital ad buys or a ton of salespeople will usually move the revenue needle. But that’s not how you build a sustainable, and someday, profitable business. Efficiency is where it’s at, and once again, building this skill is something you will need in business for your entire career. For you SaaS founders out there, learn your metrics and live by them. Let them drive how you allocate your precious cash. You should also embrace key efficiency metrics like Burn Multiple and really pay attention to both the unit economics and gross margin of your business.
This isn’t news to many of you, I realize. But it is critical to understand that these are no longer data points on a spreadsheet in your data room, but instead will be part of the headline discussion with any future investor – often in the first get-to-know-you call. Be prepared. Over the last two years, plenty of companies were raising money on solid top-line revenue growth and rosy forecasts in a big market. Those days are over for now.
Hire Slow, Fire Fast
OK, let’s dig into the hardest part. You will, in fact, need to manage your burn, and for startups, this almost always means little to no hiring, or worse, firing people. This really sucks, but developing the ability and willingness to make difficult personnel decisions is a force multiplier.
Your company is only as good as your team and there is no better time than a downturn to take a critical look at the team you’ve built and make objective decisions about every single person on it. Are they in the right role? Can they scale with the company? Could you live without them for a year?
In tough times, good enough is not good enough and procrastination is not an option. You now have the opportunity to develop a muscle you will literally use for the rest of your life in business. Most people suck at this. If you’re good at it, you have a huge advantage.
Hiring people is a lot more fun and I have good news for you: Hiring, especially in certain geographies and roles, is already getting a whole lot easier. Big tech companies are freezing hiring and laying people off in droves. The same is true for hundreds of startups as everyone looks to rightsize their businesses. The best people now have fewer and fewer opportunities to choose from, which means the best startups look way more attractive.
Now, none of this is to say you should go on a hiring spree in the teeth of a potential recession. But if you are disciplined about the current state of your team and need a key hire or to upgrade a certain role, now is your chance. Compensation expectations are already becoming more rational, and there will be fewer competitive offers for great candidates. In turn, you can be patient. Hire slow. More candidates means more opportunities to be extremely selective, and every month you go waiting for the ideal candidate means more money in the bank.
Recast Your Financial Plan
I’ve got some great news for you. In an economic downturn, and after you trim headcount, and reduce your marketing spend, no one has the right to expect your revenue forecast to remain completely unscathed. This is a rare opportunity to take a hard look at your revenue plan and make realistic adjustments to how you think things are going to play out for the next couple of years. That’s not to say, your board members and investors won’t ask tough questions, and it is never a good idea to blindside them. Nevertheless, the critical outcome is that you learn to build not just efficiency, but predictability into your business.
You also need to do this as part of managing your expenses and cash burn. If you simply cut expenses and use that as the basis for calculating your runway, I believe you’re making a potentially fatal mistake. You must factor in reductions in sales and marketing spending and their impact on your revenue going forward. The economy will almost certainly also affect the time to negotiate and close deals, the budgets of your customers, and renewals. If you’re a startup selling to startups, some of your customers won’t exist next year. You must plan for that and this is your opportunity to do so without the normal penalty of lowering a forecast. It’s much more important to be realistic and accurate.
To help you do this, our team created a guide on how to adjust your plan during a downturn.
Save The Customer Money
You’re not the only one that has to tighten your belt. Literally, every company in the world is thinking about this now, and if you can’t explain to a prospect how your product saves them money… fuggedaboutit.
The good news is that almost any B2B company and many B2C companies can be re-positioned as a way to save money and generate a meaningful ROI. You need to do this NOW.
Let’s play a game:
- I sell funny t-shirts. → My no-iron t-shirts can save you up to $30/month in laundromat charges and last twice as long as other brands saving you money on clothes.
- I have the best tasting lemonade. → My lemonade comes as a subscription service delivered to your door that costs less per ounce and saves time and gas for driving to the store.
- My collaboration software helps employees stay connected when working in a hybrid environment. → My collaboration platform has been proven to reduce employee training costs by 32% and employee attrition by 27%.
Get the idea? Try it with your own products. It’s super fun.
Your go-to-market team needs to be fluent in all the cost drivers facing your customers and exactly how your existing platform can help address them. They need a robust ROI calculator. Your marketers need to be able to communicate all these cost-saving benefits to your target market. Your product management team needs to be intimately familiar with customer expense pain and have a plan for building new features that make things better. Building a better mousetrap is not the answer, but building a mousetrap that catches more mice per trap and reduces bait expenditures just might be.
Flat Rounds Are Not the End of the World
Things have changed nearly overnight in the world of venture capital. As the public markets have contracted, the private markets have quickly followed suit, and the era of wild revenue multiple valuations for startups is over… for now.
In Fintech, where I spend most of my time, the median public company valuation of 25x has collapsed to 4x in six months. This means VCs are following suit in how they value a startup and that means far more dilution for founders raising money.
These lofty valuations were always going to come back to earth. It was inevitable. And for companies at the extreme end of the spectrum, this reversion to the mean has become very painful indeed. There is no possible way for some of them to ever justify the valuations they commanded in the private markets, and in some cases carried into the public markets.
This is also true for earlier-stage companies. When you raise money at a historically high valuation relative to revenue, you run the very real risk of running out of money before you can even “grow into” your last-round valuation.
So what’s the silver lining here, you ask?
First, smaller valuations mean smaller rounds, lower burn rates, and lower expectations for milestones between rounds. This creates a much healthier environment for setting reasonable goals and timelines. For example, a $2-3M Seed round could mean you have the runway to build a small team focused on working with a couple of design partners and developing an MVP. Small teams have the benefit of speed and focus, and raising less money means that the inevitable course correction, or two, comes with far less risk and cost. Make no mistake. A lower valuation and lower burn rate are competitive advantages.
Second, the big splashy fundraises are going to become increasingly rare, which means you spend less time competing on hype and more time competing on what you are actually delivering. A tightening of the fundraising climate is a “great equalizer” in startup land and the best builders thrive when business fundamentals become more of a focus. In fact, it is much harder to rightsize a large company, and this creates even more opportunities for nimble startups with reasonable expectations to sprint ahead.
Finally, valuations will hold much less “signaling” power over the next couple of years. The previous two years created an environment where the company that raised money at the highest valuation was often anointed the “winner.” Many of them are now facing significant backlash and scrutiny. This means those good companies that simply “need more time” don’t need to navigate the valuation hamster wheel or face death.
Tons of companies are now free to raise money at a reasonable markup or even a “flat” round at their previous valuation without raising eyebrows. What used to “signal” a company is in trouble is becoming commonplace. Of course, ideally, you want to avoid this situation for dilution reasons. But so many companies raised their last round in one world and need another round in the new world. It’s good to know this option doesn’t come with extra baggage right now.
None of This is Going to be Easy
But you know what also isn’t easy? Starting a freakin’ company, that’s what. And you have done that.
You’re already a different breed and doing hard things is in your blood. But the trick is learning how to do NEW hard things. Many founders have trouble with that leap. Great engineers can build an amazing MVP but some can’t manage a roadmap. Great storytellers can raise a ton of money, but many can’t execute their way out of a paper bag. And there are plenty of founding CEOs that struggle with building a great go-to-market motion or managing the finances. The best founders, however, are always learning, and now is your opportunity to build your skills, your team, and your company for the long haul — not just the next round of (formerly) easy financing.
Going faster and smarter is now way more important than the hype of a mega-round of venture capital and splashy events. 2022 and beyond is going to separate the real entrepreneurs (and VCs) from the tourists.
You got this.
