I’m old enough to remember the market crash of 1987 and all the subsequent ones. At the time, I was working for a commodities trader in London, my first job out of the army. The tech industry didn’t exist yet, there were only early signs as to what would mature into a full-fledged industry in the late 1990s, just in time for the collapse of 2000 and the drama of 2008. Each time it felt like the world might grind to a screeching halt.
In the midst of a down cycle, it may feel like the world has come to an end again. But after the storm passes, economic activity continues, and life — as we knew it or adapted to in a new situation — continues as well.
In times of great uncertainty, people, naturally, tend to “fold in” and contract. They reduce their personal spending and cut their corporate budgets. It’s obvious that money will be hard to come by. I want to talk about what this means for startup businesses. Frankly, it is likely to mean many things, as there are lots of important decisions to make and plans to devise as you look ahead. But right now, I’d like to focus on extending the runway.
It’s the equivalent of what you’d do if you were the only shipwreck survivor on a desert island and you needed to carefully plan your food supply until the rescue boat was visible on the horizon. You know exactly how much food you have with you on the island, but you have no clue when help is coming. So you’d extend what you have for as long as you can — probably eating more in the beginning and, as time goes by, gradually cutting your intake to buy yourself more time. It’s the same situation now. It is the same feeling, same level of uncertainty and same desire to make it through until things go back to normal. And ultimately, it’s the same basic conclusion: take action, make a plan, do not remain passive.
At times like this, everyone should have a plan of action. Even if you’re Zoom and your product is enjoying an all-time high, you still want to ensure you’re able to provide quality support (users who want to move from the free to paid product currently have to wait a few days for a sales rep to get back to them). You also need to think about the day after Corona, when demand and usage may drop suddenly. What will you do with the excess employees you hired, and how will that affect your budget and cash flow?
For the sake of simplicity, let’s divide the world into four quadrants. On the y-axis are companies whose product is not in demand and those whose product is in demand. On the x-axis are companies with less than 12 months of cash on hand and companies with more than 12 months of cash on hand.
Why 12 months? For some time now, the investment team at Aleph has been cautious about the state of the world. While we have always been sensitive to the cash pulse of our portfolio, we have watched it with greater concern over the past year. None of us had a clue as to what would transpire, or if anything would happen at all, but we always felt the need to be ready for a rainy day. In dire times, the lifeline for startups that are not cash-flow-positive is cash in the bank. Cash provides startups with the flexibility to get through tough times. Our base assumption is that 12 months is a long enough period to sustain a company through a crisis period.
I’m going to focus on the companies that have less than 12 months of cash under the two basic scenarios: a product not in demand and product in demand.
So what if you have less than 12 months of cash in the bank?
If your product is in demand these days, think about the key levers for keeping it viable. Focus your management efforts and your budget around them, and rearrange the remaining budget around it. If it sells well — like JoyTunes, for example — you’ll want to continue the paid ads, and you may want to speed up product improvements and bug solutions to create as much loyalty to the product as possible.
At the same time, this is the right time to renegotiate contracts, reduce CAC and speed up the payback period of acquisition. If you are not carefully measuring the effectiveness of your marketing spending, there will be no better time to do so than this. Measure, test and adjust your spending or your marketing strategy. This is no time for weak results.
If your product is not in demand or if you are not in a revenue stage, your focus should be on your costs. If we return to our desert island example for a second, within the reality of our company, the food we need to plan with is cash and our costs are equivalent to our food consumption. Unlike revenue, which depends on the exogenous decision of a purchaser, a company’s expenses are an element that is fully in control even in the midst of uncertainty.
The first call to action is to build a new budget that redefines priorities and tracks cash balance at the most granular level. Every dollar counts here. Pay attention to the following steps, as they are common sense moves that will help you protect your company by cutting costs and essentially reducing the weight of the burn by minimizing the loss:
1.In most software startups, the largest expenditures are rents, salaries and cloud services. At first, all seem inflexible. That may be true during an up cycle, when demand is high. But we are in the midst of a storm that ended the demand period and brought us into the “excess supply” zone. In this territory, contracts are renegotiated.
“Salary reductions” is a euphemism for salary cuts and letting go of people we worked very hard to hire just weeks ago. It is by far the hardest mission, the hardest decision with a long-term impact on your company. Nothing softens the blow of having to part ways with good and productive employees in times like these. But it is an essential step in giving the company and those that stay with you a future. You may be able to start with salary cuts, but if you think that it may take long for the crisis to end, or if you estimate a long recovery time for your particular product, salary cuts may not be enough. Be empathetic, be determined. I have been working with a founder whose company was hit hard by this crisis and lost all of its revenues and users overnight. He had to let go of more than half the workforce and cut salaries for the remaining team. It was sad for all involved, but it will enable the company to focus on restructuring the technology infrastructure, improving the product and coming out the other side prepared for a powerful return.
2. If you reduce the size of your team, you can also probably cut your real estate spending. Renegotiate with your landlord or consider moving to a cheaper space if you expect the team size to remain small beyond a few months. But remember, moving is not a small decision. It is costly and stressful and may require more resources than you currently have, so weigh your options carefully here and don’t jump to conclusions.
3. Cut travel and conference budgets. They will not be relevant for the next three to six months, and possibly even longer. Current estimates suggest that travel will be banned or severely restricted until the end of the year or maybe into the first quarter of 2021.
4. Next are consultants, advisors, team benefits and employee lunches. In Israel, for example, it is customary to provide employees with a lunch budget and other frills. The order of magnitude of today’s downturn calls for giving this practice a second thought. Remember that you are the survivor on the desert island and you need to ration what you have left for an unknown period of time. Unnecessary spending will be regretted later on if the crisis persists longer than your cash. Think creatively about alternative benefits that are more befitting of the times — like replacing the daily meal budget with weekly team lunches paid by the company, or “brown bag” lunch-and-learns around a topic, during which each employee brings their own lunch but you all eat and learn together.
5. Finally, take a close look at the company’s credit card bill. Until a month ago, employees bought extensions and developer products of all sorts and simply charged the company’s card. Hell, your product may have been sold this way, too. It’s often a small charge that requires no approval and that no one remembers to remove when the employee who bought it left. This is as good a time to clean up as any. Map the charges, find out who ordered what, what’s a must-have and what can be eliminated at this time. And by the way, it’s a good practice going forward, even in times of plenty, to control these types of spending.
To recap, if you have less than 12 months of cash, you need to adopt the desert island mentality:
- Ensure that you have enough resources available until rescue arrives.
- Determine what are the essential levers you need to have or develop during this time to remain relevant when the economy is back and demand returns
- Prepare a new budget
- Pull the brakes on all spending and do not hesitate to renegotiate contracts
- Stop the autopilot of marketing and sales spending — be more diligent about measuring your marketing
- Cut completely unessential spending and frills
- Above all, be determined but empathetic to employees and service providers during this difficult period.
This is a tough time for many across the Israeli economy and throughout the world. It is likely to take longer than we initially anticipated to emerge from the lockdown and travel ban. It is not far-fetched that some things in our day-to-day may have changed for good. Which makes the period not only a calamity, but also an opportunity for rethinking of new services and new models, for harnessing technology in ways that seemed unimaginable until just a few weeks ago; new ways of serving individuals, of building teams and managing them, of solving problems. Time to think of new ways of coming together as families and communities, but from a safe distance.
