From one startup (fund) to another : take advantage of the downturn for the upturn!
Let’s be honest — the last month has been rough for everyone and entrepreneurs are a worried lot. It is hard to predict the ultimate economic impact of the Covid-19 crisis. However, it does look like a prolonged global downturn is upon us that many believe will likely last a year, if not more. Social isolation and mass lock-downs worldwide have had an immediate, crippling impact on multiple industries. If you are an early stage startup, you are wondering how to ride through this storm.
This is the third major down cycle that I have seen in the last 25 years. The lesson I have learnt from those experiences is that downturns drive home the value of business fundamentals over fads and pseudo business metrics. More important is the fact that a tenacious group of startups and entrepreneurs lead the way through a downturn and have flourished and reaped the benefits in the years that followed the economic crises.
Well, our fund, MFV Partners, is a startup too. As a Fund I, our challenges are like that of many early stage startups. We are early in our journey, we don’t have lot of history and brand equity as a firm to fall back on and our resources are limited. Here is what we are telling ourselves — why this upcoming period is important and how we can make the best of it. Maybe some of this would apply to you as well.
1. Cut through the noise
When the going gets tough, only the serious entrepreneurs remain. There is no room for optionality. Either you are in or you are out. This clears the deck of “option value” seekers you see during boom cycle. You will see marginal businesses and bad business models quickly fizzle out.
And one of the positive effects of this is the decluttering of all the noise in the eyes of potential investors / customers / partners / hires. If you are building a company for the right reasons, solving a market need with a differentiated offering and have deep conviction about what you are building, then you separate out. You will be noticed and will have clear line of sight with your stakeholders. So, take advantage of it.
2. Build up that accumulated knowledge!
A company’s source of long-term competitive advantage comes through cumulative knowledge collected over disciplined iterative experiments on product / strategy / customer experience and the learning that comes with those experiments. They add up exponentially, not linearly. In most fields, this cumulative knowledge is often the biggest barrier to entry — any competitor must go through similar learnings.
Now is the time to focus on your core strengths and identify areas for cumulative knowledge development through iterative processes and measuring progress through validated learning. It is especially important to focus on the learning areas that will serve as the future building blocks of your business.
3. Collaborate, not just compete!
Downturns drive you to focus on your core value proposition and your fundamental strengths. Just like you, other companies will focus on their core and start trimming out non-essential projects. This is true across the board from startups to big companies. Companies and competitors that were dipping their toes in your field are less likely to do so during these times. Turn these companies into partners and create symbiotic relationships.
For example, during the 2008/09 crisis, most mobile startups leaned on each other for discovery and distribution. Despite some overlap in offerings, companies collaborated to help each other, and they were better for it.
As another example, Waze worked closely with Google and Apple and led from the front incorporating the newest features rolled out in iOS and Android releases. Google and Apple, despite having their own navigation offerings, helped Waze and regularly featured them in their app stores. Waze was even a featured exhibitor in Google’s pavilion at Mobile World Congress in one of those years.
So, frame the problem differently and turn companies to collaborators. These collaborations help catapult you forward when market turns.
4. Tap into that talent pool
Hiring is always a challenge for startups. Hiring high quality people that align with your company’s vision and culture is harder. A downturn offers the opportunity, time and breathing room to find these individuals for your company. It is equally important and often just as challenging to retain that talent as attracting it. This is a good time to build strong working relationships, drive motivation and develop lasting ties with your employees.
5. History is on your side
You won’t just get through this downturn, but you will come out stronger and flourish during the next upturn. Data from the past recessions help drive this point. Uber, Airbnb, Pinterest, Dropbox, Zoom — all these companies born during the last recession have disrupted large markets and are category defining companies today. These companies represent the fact that the ones who survive and thrive will be those who focus deeply on their customers and figure out ways to solve pain points at scale.
This research from Correlation Ventures is particularly telling — in both cases there has been a steady increase of returns post the dotcom bust and 9/11 as well as the 2008 market crash. This trajectory holds true for even older companies like Apple, GE, IBM and Microsoft among others were founded during earlier downturns. Notice the pattern here?
Downturns are inevitable and predicting what happens next is impossible especially considering the unique and deadly nature of the current Covid-19 crisis. But what we can do is focus on our strengths and be smart and deliberate about our actions. And remember, this too shall pass.
“A bend in the road is not the end of the road…Unless you fail to make the turn.” — Helen Keller
