Startup Survival Guide for the Next Recession: 12 Plays for Founders, VPs of Sales, and Their Teams

Behind The Term Sheet
Nov 5 · 7 min read

“Those that fail to learn from history, are doomed to repeat it.”
Winston Churchill

Back to the Future: 2000 and 2008

On April 14th, 2000, I was flying back to California to start my first post college job at Loudcloud. Boarding the flight, I overhead the news; the Nasdaq was down more than 9% that day and 25% for the week. The dotcom bubble was bursting. As has been well documented by Ben Horowitz, the next year was a rollercoaster for Loudcloud with an IPO, layoffs, and near bankruptcy. Because Loudcloud was heavily dependent on other startups for its business, it had to completely reinvent itself to survive.

Fast forward to 2008. I was the cofounder of Frontier Strategy Group, a subscription research firm helping multinationals in emerging markets. We were growing like a rocket ship, and then the subprime crisis hit. One by one our long-standing corporate clients told us their budgets were frozen, and they could not buy nor renew our services. We got hit hard, and this time it was far more personal.

Since then, we have been on an unprecedented 12 year bull run, and the vast majority of today’s startup teams, have never had to manage through a real downturn.

To prepare startups for the inevitable day of reckoning, I have compiled a set of 12 plays and best practices for founders and their teams from my own personal war wounds.

These are by no means exhaustive and focus on a mix of both offensive and defensive strategies as well as long-term strategic initiatives and short term tactical plays. These are sound strategies to implement in any type of economic environment, but they become far more imperative in the event of a recession.

Short-term Tactical Plays

Pay Attention to Early Warning Signals (Defensive)

There are many early warning signals of an impending recession but most are usually ignored or dismissed. Examples include budget freezes from new customers, or long term customers that suddenly are fiscally constrained and cannot renew your service. If these become trends — not one offs — across your business, they could represent the signs of a slowdown.

How do you not miss these signals?

  1. Regularly talk to your key customers to have a general pulse on the market.
  2. Ask your buyers directly what they are seeing relative to any downturn.
  3. Finally, stay plugged into the sales and customer success funnel to spot any issues before they hit you in the face.

The key buzzwords to watch for are “budget freezes”, “budget cuts”, and “spending cuts.” Also pay attention to any systemic changes in buying authority. If your decision maker or budget holder can no longer approve the purchase, and this is happening broadly, it could mean trouble.

Model the Top Line Impact of A Downturn (Defensive)

Loudcloud nearly failed because most of our customers were other start-ups. When the bubble burst, our customers went out business, and we almost did as well.

  1. Segment your customers by overall spend and financial stability to determine which are likely to withstand a downturn, and the impact on your business.
  2. Conservatively, assess the portion of revenue that would be at risk in a downturn. At Loudcloud, over 50% of sales disappeared. At Frontier Strategy Group, because our business was largely based on large multinationals, we lost about 25% of our top line.
  3. I recommend coming up with a worst case, expected and best case estimate of potential revenue lost.

Aggressively Extend Contract Length (Offensive)

Even if your customers are not up for renewal, create incentives to lock them into long term contracts (of course, if their money runs out, they will not be able to pay). Do this especially for your high risk accounts — those who represent the most spend but are least financially stable. For example, if you proactively renew for an additional 1 or 2 years, your price will remain the same or the increase will be lower.

At Frontier Strategy Group, we were able to save one of our biggest clients through a timely contract extension right before the crisis. Without the contract, they would have cancelled our deal. When the economy recovered, their contract grew from $40,000 per year to over $500,000.

While you may be giving up some short term price increases, the stability in uncertain times is well worth it.

Longer Term Strategic Plays

Refine your ICP and Go Market Strategy (Offensive)

  1. Focus your go to market and sales efforts on customers that will be least impacted, or perhaps even inversely impacted by a downturn (and those likely to be around for the long term.)
  2. If possible, try to shift the sales and go to market motion away from fledging/smaller start ups to more established firms. Today, I see way too many companies that rely too much on other start-ups for their revenue.

As an example, if your business is heavy in financial services, identify other markets that would be more immune to a recession. At Frontier Strategy Group, while we saw significant pressure on manufacturing and heavy industries in 2008, consumer goods companies continued their investments, seeing the downturn as an opportunity to gain market share. As a result, we shifted our focus to CPG companies.

Understand Your Buyer and Their Proximity to the CFO (Defensive)

Frontier Strategy Group ramped quickly because we identified a new buying node — the regional executive of a multinational who had their own budget and decision-making authority. That autonomy completely disappeared during in 2008..

During a downturn, companies put in place rigorous controls around spending, requiring more justification, lowering the threshold of permissible spending by an exec, and often freezing all discretionary spending altogether.

This impacts most functions and senior execs who are likely to be your primary sponsors.

The CFO is the new King.

Understand where your buyer fits within the corporate organization and their overall proximity to the CFO. Is this someone who has the ear of the CFO and is likely to have her initiatives supported or ignored?

Proactively Develop Messaging and Positioning for the Downturn (Offensive)

The value drivers for your customers during a downturn shift from growth at all costs to profitability, cost reduction, and efficiency. At Frontier Strategy Group, we moved our messaging away from growth towards helping execs identify and reduce exposure to underperforming markets, and to proven cost cutting strategies.

We specifically positioned our solution as a tool that would help our clients effectively navigate the downturn and emerge stronger.

  1. Because the CFO will be scrutinizing all expenditures, proactively develop persona based marketing collateral, stories and use cases that make your solution relevant and valuable to the CFO and finance function.

Does your solution generate revenue? Does it help reduce cost? Does it offset other spending. For example, we positioned our research as a cheaper and more effective alternative to consulting work.

Create a narrative for the CFO and finance before your solution is deemed expendable.

Ask your marketing team how they would shift their messaging during a downturn and go through a basic messaging exercise?. You do not need to have the full marketing plan developed but having a high level idea of what you will say will be invaluable.

Is Your Product A Must Have or A Nice To Have? (Offensive)

In a crisis, execs are asked to rank order their spending on people and products. The ultimate question which comes up is can you run your business without a particular tool or solution? Workday? No. Salesforce? No. But for most solutions, the answer is yes.

While you cannot transform your product from a nice to have to a must have overnight, you can make the choice between cutting and keeping your solution more difficult for your customers.

Can your product generate data and analytics to help the business either drive more revenue or cut costs? Can the product be integrated into key sales or operational workflows that would make removing it a completely nightmare?

Fundamentally you want to create a situation where while your product is not a true must have, eliminating it altogether would create significant pain, costs, value loss, and change management for the client organization.

Motherhood and Apple Pie Bottom Line Plays

Keep 24 Months of Cash on Hand (Offensive)

Start ups fail because they run out of money and money becomes even more scarce in a downturn. If possible, maximize cash on hand either by raising additional capital or by reducing your burn to a point where you have 24 months cash in the bank.

Build a plan to profitability (Offensive)

Work with your exec team to build a business plan that get you to profitability with the cash on hand. If you cannot get a path to profitability, find one. Most start-ups have the false belief that funding is always available at the desired valuation. Those are in for a rude awakening.

Establish Operational Controls (Defensive)

At Loudcloud, we had virtually zero operational controls for spending. And most start-ups are no different, especially when you are optimizing for growth. Anything goes.

Put in place basic operational controls that creatie spending limits for execs and functions and require multiple approvals above specified thresholds.

Slow down or freeze hiring unless it is absolutely critical.

Make a list of all of your SaaS tools and eliminate those that are not essential or duplicative. Take spending off individual’s credit cards and put them on the company cards.

Reduce internal travel and put in place controls around travel to drive costs.

Get a free assessment of your cloud infrastructure spending from your provider — this can usually reduce your spend by 10–30 percent

Reduce Unproductive Resources (Defensive)

Cutting people is the option of last resort and is still necessary. Eliminate those resources that are unproductive or not delivering ROI. Perhaps you have sales reps that have not hit quota or senior execs that are simply not punching their weight.

Most of the fat in an organization is at the top and in your highest paid employees. Cutting a few admins and SDRs does not make a dent!

Develop A Recession Plan (Offensive)

Leveraging the above strategies and others, work with your leadership team to develop a recession contingency plan that can be rapidly activated. The worst possible scenario is not being prepared or assuming that your business will not be impacted.

About the author

Alex Gorbansky is the Managing Director of AEAE Group a New York based research and consulting firm that advises growth companies on sales, marketing, and go to market strategies. To schedule your complimentary recession readiness assessment, email gorbansky@gmail.com.

Behind The Term Sheet

Written by

I am a founder and consultant to startups and high growth companies. This is my blog. I can be reached at gorbansky@gmail.com

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