Dear Entrepreneur: Winter is coming
There is no doubt that the current epidemic will have an impact on the economy. We don't need a degree in economics to know that part. The challenge that each entrepreneur faces today is simple. How would I cope with the coming winter of business struggle?
As a fellow entrepreneur, I empathise and realise that your struggle is unique to you but here are some thoughts that I have been having that I thought I would start implementing. I am hoping this would help your cause as well.
Which businesses will be impacted?
Whenever there is an economic impact the most obvious businesses that get hit are businesses that would be considered discretionary expenses by customers. Just because there is a pandemic, we dont stop brushing teeth or going to the doctor. We would definitely stop eating out, going to movies and malls and reduce the number of time we hang out with friends. Movies, malls and other forms of entertainment would be considered discretionary spend while buying essential grocery or going to the doctor would be considered mandatory spends. Discretionary spending will be directly impacted, anywhere between 30% to 80% if not more.
If your product falls into that “discretionary spend” category, you run the risk of taking a big hit in sales. There are definite steps we can take to protect ourselves from this downfall. Let me cover each aspect of it in subsequent sections.
Care for your customers
Your customers are impacted by the epidemic. You have to deeply understand what that means to them and how they will see your services and what you offer them.
How can you tweak your offerings to be more relevant to them at this time of a crisis? The simplistic answers tend to be boolean in nature ie. we have to re-design the product or let go of the customer as unviable. The harder answer is the nuance of finding out how your can change and tune your product to serve your customers at their time of need. This is by far the hardest part of the exercise since you will be required to relook at your product and determine how it can be reshaped while working with all the other constraints that we will cover in detail.
Re-imagine your Customers
If your product is a discretionary spend for your current customers, There are a few things you can do to re-position your product.
Shifting from Discretionary to Mandatory
It is time relook at who your future customers can be — Is there another set of potential customers of your product that would consider your product not discretionary but mandatory for their needs ?
An example of this would be let us say your product is an App for video based pair programming ie you can share screens and live video to discuss and do pair programming. Now developers may simply decide that they are better off doing this in person and in the office so you are facing challenges in adoption within your user base. Now if you pitch the product to an outsourcing company where they have an onsite — offshore model and teams working in two geographies, your product would be mandatory for them to perform their job. So from a “nice to have” your product becomes absolutely must have for a different user base.
Opening up new markets
In his seminal idea of disruptive innovation, there is a talk event that Professor Christiansen participated in in 2004 where he explains this theory with a whole bunch of examples. Here he talks about a concept called “new market disruption”. In its simplified form, the concept is to create a version of the product that can be positioned to a set of users who have never had access to such a product. In the professor’s own words “a whole new population of people can now afford to own and use a product who historically couldn’t do it because they didn’t have the money or the skill, and it creates a booming new market out in this new plane of competition and doesn’t effect the business of the original players at all for a very long time.”
If there is a way to re-purpose your product to a create a new market disruption, that would be a great way to create a new stream of prospects and customers in the current situation.
Be Frugal
While you relook at your business,You still have to survive the long winter to pursue this new business. Your company’s ability to survive is predicated by simple set of rules.
- If you have less than 6 months runway you have an existential crisis.
- 6–12 months you might survive with reduced aspirations of growth.
- > 12 months if you have cash to survive this long, you will possibly survive if you re-imagine yourself.
Yes I am sure there are a lot possibilities out there but I think this is a framework that you have to stick with for now.
Review marketing spend
If you are anything like us, your marketing is one of your largest spends at the moment. Given that there are challenges in growth start reviewing your conversion funnels very closely and cut down on funnels that dont perfrom right away. You have to reduce your marketing spend. Your board will tell you that in your next meeting. Might as well start cutting out the bottom feeders right away.
Review sales forecasts
Sales plans that were created on or before March 15th 2020 would now be suspect. A serious relook at the plan based on your prospect and client profile should be undertaken. Once you decide what is the customer base you are going to go after, do think about how you can reprice your product to suit the new markets.
Review Product roadmap
The product roadmap was created based on the customers and prospects that you had targeted. Given the new outlook, you should recast your product roadmap to best serve the new plan. The product roadmap should address the new customer needs as much as it covers existing customer’s requirements.
Revisit your hiring plan
Along with new sales plans and product plans, the hiring plan that looks at Engineering, Operations, Marketing and customer service should be revisited. While a startup typically does not plan more than 3 months ahead when it comes to hiring, once we start thinking about who we want to hire, new ideas will come in terms of the kind of talent we want to attract to the company.
Improve your cash position
In this economic situation, a strong cash position is the kind of fiscal discipline that your finance and operations team should develop. Some of the time tested practices would still hold good if you are a B2B / B2C product company.
- Increasing pricing for new customers
- providing discounts to customers who can signup for longer term,
- creating better product bundling,
- raising your invoices on time, following up on invoice payments.
- Asking vendors for discounts for faster payments of their invoices,
- re-negotiating any long term vendor contracts for better payment terms and rates etc.,
Most of the standard financial principles practices by a good CA/CPA will be enormously valuable at this time.
Valuation will be depressed
Investors will not be cutting cheques for multiple reasons. Economies worldwide have shrunk. There is a flight of capital from various countries back to US and UK. There is not enough money to go around so more startups are chasing the same available capital.
So even if we manage to peak investor interests, they will be looking for picking up stake at a valuation that would not match what they would have paid for say 6 months to one year ago. Investors also realise that subsequent funding rounds after their investment could also be at depressed valuation.
Any fund raising activity at this time will result in a depressed valuation for the entrepreneur. Unfortunately there is no way around this problem. Unless you can defer your fund raising by 18–24 months, you will be part of this cycle.
Maintain high business hyigene
Whether it is business as usual or a pandemic crisis, reduced quality of service would be acceptable but no client will compromise on security, privacy and quality. You cannot appear sloppy by failing to keep hygiene standards in your business. Make sure you keep a strong leash on some of the core reasons why your customers trust you in the first place.
Given the challenging business environment, customers will have a chance to shop around very easily. Being sloppy will give them a definite reason to do so.
I sincerely wish and hope that I am wrong — probably the first time I am concluding this way in my blog post but I cannot help think that this epidemic is going to shake up the way we live.
