A few thoughts on the current market evolutions — Chapter 4

By Xavier Lazarus, with help from Marc Rougier, Saish Rane, Justine Guers, Delphine Villuendas & Louisa Mesnard

Facing this new market condition, I gathered thoughts and analysis from both discussions with key players on both sides of the Atlantic and based on my past experience in times of crisis. Having started when some of my colleagues were still in Kindergarten, 20 years ago and 3 crises ago, is one of the few privileges I have in the market!

In these five chapters — published weekly on our Medium account, you’ll find a compilation of data, insights and advice I’d like to share and discuss with you. This is by no means a sure-fire thesis nor an omniscient crystal ball, rather the strong desire to share data and provoke thoughts, so we can collectively weather the unfolding stormy conditions.

You can find the previous articles here: Chapter 1, Chapter 2, Chapter 3

Here is my take on what advice an entrepreneur could consider when dealing with this market’s consequences — keeping in mind that advice is to be given, not always followed. To the entrepreneurs: the real answers are to be found deep in your mind and soul. My advice here is to question, stimulate and puzzle, in order to help your own solutions to emerge.

Let’s start first with a few general points on the financing consequences of the crisis for your business:

1. Totally rethink your company

Your 2021 company has disappeared. Gone. Instead, a 2022, -23, … company is rising. It is made of your current company’s assets but with the constraints of the new market paradigm. For the same reasons that you made a lot of design work preparing for the launch or the scale of your business in the past, it’s time to get your T-square, compass and Rotring pens out of the drawer and start drawing a new set of blueprints (I know, this metaphor is clearly stating that I am in my fifties, maybe I should’ve said “launch your SketchUp app again”!).

Reassess every key question upon which you built your venture: am I in the right market under the new macroeconomic circumstances? Does my product fit the bill on the addressed market and on customers’ expected behavior today? Do I have a resilient business model and go-to-market strategy? What about my current team — would I still hire them all today? Am I missing some key profile to execute the renewed project?, etc. And then, what is the “cost” for my company to pivot and/or adapt to this new reality? If the new company you so re-designed doesn’t look appealing or the old one is not flexible enough to transition, then you should probably look for a plan B as described in the previous chapter.

2. Get your time variable back in control

Most of our fellow VCs wrote great posts about wise cash management, runway expansion to at least 24 months etc. Here are a couple of these posts that we particularly like (here’s one by Index Ventures and another by Sequoia) so I will not rephrase them. Some used the metaphor of the camel needing to manage its water when crossing a desert, or any other variation. Nor will I try to find another image to tell entrepreneurs to prepare for frugality if not hunger — even if I am dying to tell you how geese use their capacity to trigger liver steatosis not only to make the French happy with their Christmas foie gras canapés but mostly to be able to migrate thousands of kilometers without hardly any feeding during the journey.

The limit of this now widely spread market advice is simple: we are telling entrepreneurs to be able to wait for 24 months, but what if after this period, the market is still flatlining? Actually, my vision on the interest of spend control is not to increase runway per se but to take back control of the timeline. You need cash to be able to reach the next point in time when you can get more cash. This cash could come from self-financing since gaining cash from your own EBITDA is always the final goal of any company (yes, even the VC-backed ones). This could also come from a new round after reaching enough market proofs or milestones to be able to raise it. The consequence of the crisis is that the already high bar will keep rising in both cases, so you might need more proof points, more customers, more traction, more revenues, etc. to be able to raise a new round or breakeven, hence more time will be needed. Waiting for the market to be back in shape is not enough; turning your company into a cash-efficient one is required.

3. A bridge financing is not always the solution

The current temptation that we see in the market is entrepreneurs trying to extend their runway by requesting preventive bridge financing. The most daring ones even try to convince new investors to jump in. To be honest, this is not a good idea. A bridge, in the real world, helps you go from Side A to Side B of an obstacle (rivers, roads, tracks, cliffs etc.). Entrepreneurs mostly know where they are (Side A) and that a market obstacle is forming. A bridge discussion can only be fruitful when you have a clearly defined Side B and analyze the kind and size of hurdles you are facing. Bridging for closing a new round or bridging for pivoting are definitely not the same kind of discussions between founders and investors. So, use that financing tool when and only when you know where to go and how to get there. A bridge that leads nowhere is a pier and if you walk on a pier, well, the only thing that I am sure of, is that you’ll get effectively nowhere. It’s an easy lesson to remember if you speak French: a pier sounds like pire, which means worse…

Now, let’s share a little bit of advice on the businesses themselves.

4. Monitor Churn like milk in a boiling pot.

Growing is very hard when cash is missing and even more so if you need to buy back your customers over and over. This explains the appetite in the funding market for recurring models and their higher multiples in valuations compared to non-recurring ones.

In times of crisis, a huge risk lies on churn increase, especially if your main customers are SMBs, and a high attrition rate will surely jeopardize your capacity to grow and to attract new investors. Worse, if you come to a point when churn rate is above upsell + new bookings, then your survival is at risk (think about the cash-flows of a declining prepaid SaaS company…)

Focus on not letting go of your most valuable and already acquired customers! More than ever, customer satisfaction and stickiness are critical assets.

5. Try to ensure that the off-button is hard and/or costly to push for your clients

In good times, the best way to prevent churn is to have a good product in the hands of the end user. In bad times, this will not be enough — price will become again an important decision criterion. Indeed, when you feel rich you may enjoy a weekly dinner at a fantastic Michelin starred restaurant, but when money is missing, you need to ensure enough calories for surviving: you won’t decide to eat only once a day to be able to maintain your weekly fancy routine.

The best way to prevent churn in down markets, is to make sure that the cost of churning is very, very high for your customers. Either because it’s risky and difficult to replace your product with a cheaper yet good enough option, or because ending your service takes out the visible and needed benefits of it (less revenues) which will then definitely convince them to keep your product or service. Just call your customers and you will know.

6. Lowering your product prices is a short-term fix but a long-term hazard

Another temptation to prevent churn or sell more easily, is just to lower your product or service price. If you believe that your USP (Unique Selling Proposition) is pricing in crisis time, well, you’re in a bad position. In crises, your low quality competitors will lower their price too and you will end up in a death spiral. Eventually, a new kid on the block with nothing to lose, will come with a freemium version and wipe any competitor out of the market.

So agreeing to risk to churn part of your customers is sometimes necessary to keep your strategic value and market positioning intact.

This sounds a bit counterintuitive. To make more sense, let’s check how luxury champions behave in crisis time: they usually increase their prices. They accept to lose their lower tier customers and hope to compensate for that with an ARPU (Average Revenue Per User) increase in the remaining customers. Why would they do that? In order to keep the “not as rich as before” customers buying luxury goods, a luxury brand would have to keep lowering its prices. First their really rich customers, the ones who never check price tags, would start paying less for no reason and second, at some point this “high-end segment” which is their bread and butter, would stop buying completely because at such a low price, the brand would not remain a luxury brand anymore.

7. Resilient or countercyclical sectors: if you can’t be ‘em, sell to ‘em

The first part of the advice is obvious, being in a resilient or countercyclical sector is currently the best possible situation. But what if you are not? Then reassess your market segments and try to find which of them are resilient or countercyclical. Selling to or retaining healthy customers is always much easier.

8. Talk to everyone — your clients, your team, your investors

The detailed answers to your questions are just as likely to be found in any blog post (such as this one), or market communication, as they are in fortune cookies (the difference is that fortune cookies at least taste good). Answers are to be found inside of you; the fuel that you need to find them is a combination of gathering relevant information and the discipline of asking the right questions — and of course the courage to question yourself. So first talk to anyone who can provide you with information or questions. Talk a lot internally but also get out of the office (or your remote setting at home) and visit your customers, your market hubs, your partners, etc.

And when you believe you reached some conclusions, then talk to them in return. Information sharing is a two-way street where the value of the assets increases after each back and forth between players.

To end this chapter, let me share some advice at an individual level.

9. Accept the situation

You should quickly go through and end the grieving process of the long gone 2021 market. We can use the Elisabeth Kubler-Ross DABDA curve to understand why this is not yet done by many entrepreneurs and investors. In grieving times, people experience first Denial, then Anger, Bargain, Depression and finally Acceptance. It’s impossible for you to smoothly weather the crisis if you haven’t reached the Acceptance state. More worrying is, when you see the proliferation of requests for SAFE fundings at later stages than pre-seed, many of the entrepreneurs are still in the denial / bargaining phases… And some VCs recently issued Seed stage term sheets that made me believe that some investors are in the same state of mind — way closer to Denial than Acceptance. So even if there is a non-zero probability of being lucky, the issue is that the market is drying and time is running out. If you need money in the short term, run and just get the money in, whatever it takes. In a nutshell, accept that you may need a haircut, and if so, get it done while there are still hairdressers available.

Last but definitely not least, acceptance is the only way to keep your mind and your vision clear, which you obviously need when navigating a rough sea. The market conditions are tough, the rules of the game have changed? Alright, fair enough. But it’s no drama, it’s nobody’s fault, it’s just a call to adapt and play smart. Stay calm and keep leading!

10. Share bad news as early as you can. Even if they are just at threat level.

Sometimes, your conclusion won’t be shiningly clear. Sometimes you will see clouds ahead, too big to be avoided but not sure if you can fly through them. In a foggy situation without a compass, most of us would wait and see or pray for a bit of luck. Furthermore, nobody wants to deliver bad news especially if it means you are incidentally disclosing that you are not succeeding as expected. This is even more difficult and embarrassing, if you are the smart and highly educated founder, with no stain in your resume.

Please, swallow your pride and share the news or the risks as soon as you can to anyone who needs to know them. You’ll see you’ll find in these difficult exchanges, unexpected constructive feedback, genuine support, strong empathy and you might even be given resources and ideas that might change your trajectory and make it way safer.

And remember, unless you have been very obnoxious recently and deserve a bit of Schadenfreude — or unless you have picked the wrong partners — no one is here to judge and lecture you.

11. Don’t end up alone, fragilized and unable to make decisions

To try to make the right decisions, you’ll need to increase your trust level more than ever with a selected group of people around you. With your co-founders. With most of your executives. With some key contributors. With your most loyal customers. With your crucial business partners. With your lead investor. With the majority of your board members.

Creating these multilayered circles of trust around you is the only way not to end up isolated with an unbearable burden on your shoulders and nowhere to unload even a bit of it. It will also be better for your stress level and mental health.

You should be able to talk regularly and in advance to the right people about whatever you have on your plate, and what looks hard to swallow or digest. The sooner, the better. Remember that if you are drowning, asking for help too late means opening your mouth when you are underwater. I’ll let you imagine the consequences.

12. More than ever, balance your life and work.

Finally, 2021 looked like a long sprint. Letting everything else go while running with the pack until your lung exploded, looked like a great plan last year. And the payoff was worth it. It’s over now and most players in the market are exhausted. We are in a new phase, which looks more like running a marathon in difficult conditions. Running fast is therefore less interesting than running well and for a long time. You’ll need to rest and prepare for a long period of difficulties and efforts. It may not end as bad as expected or may be shorter in duration, that’s my hope. But if you have prepared yourself for the worst, then it will end up just being tough, and you’ll be proud when it’s over. Remember, when you have run a marathon, you are offered a finisher t-shirt, not a winning medal. That’s the real victory.

You can also find the 🇫🇷 version of this paper in Maddyness here.