Startup survival during an economic crisis — tips, tactics and cashflow
We’re entering a dangerous phase for tech startups, and you’ll need to get creative to survive
There’s no doubt we’re in unprecedented times, and likely at the beginning of a long journey back to normal — whatever the new ’normal’ turns out to be. While governments are rushing to get debt relief packages in place for the economy, the high risk, high reward tech sector will need something different. To survive you’re going to need some fancy footwork, hard choices and a lot of shared pain between founders, staff, investors, suppliers and customers.
With my startup, Moonfruit (a DIY website and e-commerce platform, serving 7m sites globally) that I co-founded with Wendy Tan-White (now VP at X, Alphabet’s Moonshot Factory) and eirik pettersen (now CTO Secret Escapes), we survived the 2001 dotcom crash, when the entire tech sector was decimated for years to come, and the 2008 financial crisis, when we were lucky enough to experience rapid countercyclical growth. These experiences made us stronger and ultimately led to our successful exit in 2012 and post acquisition growth to $150m ARR.
I’ve spent the last 5 years a General Partner at Entrepreneur First, raising $200m of funds, and advising hundreds of startups, through formation, growth and fundraising — right now I work with many of them daily on survival.
For most companies I think this crisis will look more like 2001 than 2008, though there will be some who are lucky enough to grow through it. The good news is, having been through this before there are things you can do as a founder or and an investor, that can stop it being as bad as last time. In the UK, I’m in several conversations about making emergency equity funding more available, and I hope this happens all over the world too.
Here is your tactical guide to surviving the crisis.
2001 — surviving a massive industry crisis
The fabled ‘dotcom’ crash, triggered by the Nasdaq collapse in late 2000, and running through 2001 was a tech industry financial crunch. Public company values collapsed, IPOs failed, funding rounds evaporated, funds collapsed and the company landscape was carnage. There were many bad ideas and bad businesses, but some good ideas got flushed too, but given the online population was 300m then compared to 4.5bn today — the stakes are much higher today, with many more companies doing great things that we do not want flushed.
For Moonfruit back in 2000, we had 70+ staff in 3 countries, had raised $15m, and had 500k users of our technology after 12 months live. We were about to raise a $20m round,but as the crisis unfolded, the deal disappeared.
What we did
We had a burn rate of $750k per month, 3 months of runway, no revenues, and 500k customers using our free website building tools. It was hard to see a way out of this.
Get real, communicate and take action
The first thing we had to do was get honest about where we were,face up to it, then act. We worked out a plan for how long we could pay staff and meet our liabilities and communicated it to everyone ASAP.
Staff first, we broke the company into small groups, one for each director and we communicated to them simultaneously and with empathy. We had our coach support us in this prep.
Our message was simple. We’re out of options, we need to let everyone go, except 10 people to keep the service running (70->10), we’ll pay notice periods and redundancy, and personally support everyone to get new jobs — but we asked that they work their notice period to rapidly develop and online billing system for our customers — 2 lines of code today — but in 2001, this was serious effort.
We then communicated to our investors, told them the plan to reduce burn, switch to a billing model and hope to stabilise the company before insolvency.
The results
The transition to subscription decimated our user base, but got us to $20k MRR — tiny, but enough to keep the server lights on. Our 10 person team started doing agency work to subsidise engineering for another 6 months. After that we went down to 2, my co-founders Wendy and Eirik. Even I left to go to McKinsey (as I’d never had a real job — overrated btw, real jobs ;-)) — but it was stable.
In this landscape there was no capital to raise, and even our investors were closing down their funds. Given we had communicated to them early, , and not gone insolvent, they allowed us to buy back the business from them for a fraction of the original investment. It was decimated, underfunded, tiny — but it was ours.
I came back in 18 months later, playing tag team CEO with Wendy (now my wife — added crash bonus!) who came out to have our 2 children (and because she can’t sit still do an MA in Design). It took us until 2007 to hit $1m MRR, we then doubled nearly every year after, Wendy returning in 2008, until our exit in 2012. It was a crazy, sometimes brutal, but hugely rewarding journey.
What I’d recommend/do differently today
The first action is always ‘get real’. Know your cash, know your burn, know your customers, know your suppliers. Be realistic about future sales and future costs. Plan for the worst so you can only get upside. If you’re in denial about this, you will crash the business. Plan different scenarios. Know what you’d do if you only had 6 months, or 12, or 10 people, or 2 (whatever is appropriate for your business).
Figure out where the cash will come from
You will almost certainly need to improve cashflow to survive. You will need to get creative with where this comes from. We did nearly all of these.. Even if your investors will plug the gap, this is also a time to get lean, get grateful and get hungry — the best businesses can be built through crisis.
Customers
Customers are by far the best source of cash if your producis critical to their needs. We started charging to generate cash, and later raised prices, and introduced new product tiers to drive up sales — all good SAAS management. Even if you are pre-revenue, some customers may contribute to your survival if your product is important enough to them. Don’t be afraid to ask.
Investors
Get your realistic plan to your investors, and help them understand why — with all their companies in crisis — they should back you to win. Don’t get crazy about valuation — be fair. You can always create upside options based on performance to re-up the team and founders. Don’t forget these people are putting in real cash into your business. And they’re doing it for profit.
Staff
Being transparent with your team is also critical. If you have a realistic plan they can get behind, they will. But if you’re in denial they will see that — they’re scared but they’re not dumb. The team can also be a source of cash. Some you may have to let go. Some you can agree to take a salary cut to allow more to survive. Never force this on anyone. If everyone takes an XX% cut, it can extend survival for everyone — the best approach is to treat everyone in the same way and lead by example.
You should also recognise that if the team takes a salary cut, they are effectively putting cash into the business. It’s perfectly reasonable to compensate this with additional options . In our extreme case, the investors couldn’t put in anything, we cut our salaries and bought the company back — quite a big equity transfer.
Suppliers
Ask for a discount from everyone you pay bills to. If you go out of business, they lose. Better to take a 20% cut and keep you alive. Don’t be afraid to ask. I would call our major suppliers annually to reduce our costs as we grew. It’s a good habit.
Government response
Governments are rightly focused on mitigating the impact of this crisis on the wider economy, which still vastly outweighs tech in terms of size and employment. Most of the initial response, largely debt funds, may not be appropriate for early stage tech. Be sure to follow what is on offer — payroll tax cuts, R&D tax credits, grants — anything can help.
2008 — growing counter-cyclically through a crisis
The financial crisis that started in the subprime mortgage market in 2007 and rippled out through 2008 threatening the worlds largest financial institutions, and then the entire real economy through a massive credit crunch, was a second crisis that we had to weather. This was a crisis of the real economy which hit tech, not a crisis of the tech economy itself, so in some ways not as bad, though customers, suppliers, financiers, all suffered and this had a chilling effect on all economic activity.
Again, funding rounds dried up and became harder to close. Customers stopped buying, and deals got delayed.
For Moonfruit, our growth actually accelerated in this period, which initially surprised us. We provided cloud-hosted website and e-commerce software — as people lost jobs, they started new businesses, and for that they started building websites and stores.
What we did
Once again, this starts with getting real. As soon as we understood what was going on, , we doubled down on growth.
We doubled our monthly ad spend, and ran down our cash reserves. We stepped up our partnership activity, as even those that were previously uninterested wanted to distribute -partnerships flowed in the UK, US, Australia, France and Canada.
We hired more engineers and customer success staff. We reintroduced an ad supported free version for those that couldn’t afford the subscription, and slowly increased the capacity on all tiers of the software. Our customers saved us in the crash, and we wanted to honour them in the boom.
We took capital from US investors to accelerate growth on route to a large planned Series B, though in the end the Series B never happened, as our US partnership deals turned to acquisition deals. 12 years into our startup journey, and having been through a brutal crash, we decided to sell in late 2011, running a competitive process and completing in 2012 the day before the Facebook IPO that crashed 50% and knocked tech exits sideways for some time. We were glad we’d sold.
What I’d recommend today
If you’re lucky enough to be growing through this crisis, be sure, be grateful and be generous. Know the facts and make a new plan. Figure out how much risk you’re willing to take, and whether you need more capital to make that happen.
Step on the gas and pour fuel on the fire. If your product is useful in a crisis this is giving customers what they want.
Be generous
Don’t raise prices, don’t take advantage. Find a way to make your product more available. If you’re generous, customers will stay with you and repay you later.
Be generous to your suppliers and partners too. If you’re the one able to generate income, pay them on time, don’t take advantage, help them stay afloat.
VC response
A lot has been written about good and bad VC behaviour in difficult times, so I won’t dwell on that here. But as a founder, communicate early and regularly with your investors. Your competence and good behaviour should encourage the same from them. For VCs, be fair, be brave, be creative. Founders have a lot to process before they can take action. They carry a 1:1 risk with no portfolio to balance. Do what you can. Founders will remember how you behaved with this company when you ask to invest in their next. Or their friends.
Media response
It wasn’t until 2009, when we surprised everyone by riding the social media wave back into the media, described so aptly on Techcrunch.
So, when we get through this, my ask to the media is, let’s celebrate the survivors, let’s give them a rebirth and the boost they need to keep going.
Counter factual
I often wonder what would have happened if we’d let the business fail in 2001. For us, it had a happy ending — 11 years later — but if we’d taken all the knowledge from the first failure, and started again with white space and a clear run — what would that journey have been like?
So if you can’t make this work, and your business does fail, that’s going to be tough, but it’s also the start of something new. And knowing what you know now, and all the lessons you’ve learned, your next thing may well change the world.
We’re in.
Originally published on TechCrunch
