Startup management in Crisis

How to manage our own panic and get our head around the situation

Being an entrepreneur is a fascinating and entertaining path to take in life. However, this comes at the price of dealing with increased levels of uncertainty in everyday life and making tough decisions when there are no easy answers.

Every crisis brings uncertainty to extreme levels and often forces business leaders to act under extra pressure. This can trigger decisions that are far from rational. In the coming series of articles, we will focus on the key aspects of managing a startup in a situation of external difficulties and an economic downturn.

Retention is easier than acquisition

It may sound obvious but retaining an existing client is always easier than acquiring new ones. According to various studies, it costs 5 times as much to acquire a new customer than to keep the existing one. In addition, improving retention by 5% increases profits by 25% to 95%. It seems like low-hanging fruit, doesn’t it?

How to do it?

· Segment your customers (in terms of their financial situation, the impact of the ongoing situation, decision-making process, role of your product in their organization)

· Keep your product healthy

· Educate the client

· Make your customer service people be much more empathetic, available and efficient

Maintain your marketing spend

Even though one may have the urge to cut costs across the board, there are some categories that should remain mostly intact, and marketing is one of them. If the global marketing budgets are falling it means, that it will cost less to gain the same visibility. Furthermore, cutting positive ROI marketing spend would lead to a death spiral with old customers slowly churning and new ones not being acquired fast enough.

Pricing

Ok. So we’ve got our retention and marketing right, now’s the question of how to manage pricing. If you are to decrease the prices, even temporarily, be mindful of how you communicate the changes in order not to dilute the perceived value of your product. This is especially important for SaaS companies, where the marginal cost of delivering the product is close to zero.

Create scenarios

Creating scenarios will not only allow you to stress test your company, like what is my runway if I lose 80% of the most COVID affected industries, but it will also allow you to put all other decisions into perspective and plan responses should any of the scenarios materialize. Scenario planning is helpful with all big decisions regardless of the economic environment. The scenarios should not be simple statistical operations like, what happens if the growth is 30% faster/slower, but should rather be driven by certain business hypotheses (like our brand new functionality is a perfect tool for e-commerce and will reduce churn with this group form 5% to 2%). In a perfect situation, the scenarios should assume proving or disproving the stated hypothesis.

Cut costs where it hurts the least

Ok, I’m not cutting my marketing spend, but I still need to manage the cash burn. Start from identifying the cost positions which are absolutely essential to generating cash in your business vs important but non-essential vs nice to have. First see where you can renegotiate the terms, later consider outsourcing non-essential functions and cutting all or most nice to have activities, but without clear ROI.

Manage cash flows

This may sound trivial, but cash flow management is crucial for the survival of every startup as it is dependent on its ability to pay the bills. In recent years we often heard that startups should prioritize growth at all costs and take a new financing round every 12–18 months. Recently this approach is being tested, and the situation is likely to promote companies with higher financial discipline levels that manage their burn rate actively (one of our founders when asked about his runway always responds “10 months”). Having a runway means being able to negotiate, choose the best deal and leave the table when the terms are not satisfactory. It also reduces the risk of bad decisions made under too much pressure.

If you find any of the above useful, be sure to check out our next articles, where we will elaborate on each topic in detail.