Winter is Coming…
Leadership Preparedness in Economic Downturns
“Winter is Coming. We know what’s coming with it. We can learn to live with the (current circumstances) or we can be added to the (graveyard) of the dead.” — John Snow … sort of.
We have seen this before, and we will see it again. Economic cycles are a predictable pattern and there are rules for each season. Much like preparing in the fall by winterizing your pipes and stocking up on heating oil, it is time for every business, but especially early-stage startups to learn the value of seasonal change. While we may be facing an economic winter, and by all predictions, a fairly cold one, after winter always comes spring. The key is to make sure you prepare well for survival.
There are the obvious pieces of advice floating around most blogs, and all of the names we have grown to love and trust in the world of startups and venture capital. Most advise founders to watch their runway and begin to think about what the next 24–36 months need to look like to survive. TechCrunch published the recent note from YC on the subject and it has valuable insights. If you’ve reached milestones and have interest from investors, most would tell you to take it now. Articles are beginning to discuss the retraction of capital in the market overall, that VCs are having a more difficult time raising, and therefore it will affect investments. There’s almost an “of course it will” moment with these headlines. Valuations are adjusting and we are seeing things come down in biotech, SaaS, and the general market.
What then are some key areas that founders can focus on to prepare for winter, and how can they do it effectively? I coached a number of clients, CEOs, and leaders through the 2008–2011 downturn and the success of a few smart people has left us some clues as to what to do next. I’m going to mention three points that support winterizing your business that build what is currently being shared in most business communications on the topic.
Tighten the belt — with support.
Fiscal responsibility is a moral imperative of the CEO of any business, especially in the start-up world. I remember hearing this for the first time from Outreach.io co-founder and CEO Manny Medina. You have been entrusted with capital — the lubricant that keeps the gears of innovation moving — and you must be an excellent steward of the funds. Now is the time to realize that you must stretch every dollar and make it worth ten. Yes, the cost of business is increasing due to factors such as inflation, supply chain issues, and what some call “the great resignation.” This means you must get creative. And of course, it’s time to stop any unnecessary bleeding. Fire the coffee vendor, negotiate longer terms on payouts, know your burn, and really look at necessary roles in your organizational chart. Support roles may have to be reassessed until things shift.
Your board has experience, and they are on your team. As a founder, going at this exercise alone is a recipe for disaster. Just sitting with your CFO and accounting team will also generally mean you lean one-sided. Many of the financial decisions you will make are going to impact what you choose to test or innovate, the schedule to hit milestones, and may include scaling back side projects and doubling down on just a few focused areas. Make sure stakeholders are able to give you feedback so these decisions are not made in an echo chamber. In the end, this is not cutbacks by committee. As a leader, you must make these calls. In times of uncertainty, over-communication is KEY — and it goes two ways. It is in your best interest to get good feedback and really listen. That leads to our next point.
Prepare the TEAM through alignment.
Years ago, I did a study on how INTEGRITY shows up in executive communication. I landed on a book by that very title; “Integrity” by Dr. Henry Cloud. Chapter four is entitled “Building trust through connection”, and he outlines the blunders of a disconnected CEO who lacks empathy during layoffs. Your team sees the news, watches the instagrammable and tweetable bullet points, and is already forming a “virtual villain” in their head about the economy and how things will impact them. Many know that at some point a shift in the business will roll down to them in some way. They are bracing for impact already. The question is, are you OPENLY discussing this with the team yet?
Often leaders will sit and craft a message that is far from where the team’s reality sits. It’s a sales pitch on the “why” behind tough decisions. They want to paint a vision for things being better and assign reason to what many see as unreasonable life circumstances. As business owners, we want to avoid making things worse than they are for our team — leaders know this. It is the mandate of a leader to see it as it is and acknowledge things as they are so that there is a shared reality with the team. If you jump too soon to a vision for it being better, and that better vision includes a 30% layoff, no one will feel good about your better vision when you aren’t also honestly addressing what it is.
Steve Wynn knew this back in 2008. During the crash, he committed to finding a way to support his teams and not lay off anyone if he could. Through collaboration and listening, he and the team found a solution. They decided that salaried employees making $150,000 or more would realize a 15% cut in overall pay. Team members earning less would receive a 10% reduction. Finally, hourly employees would see their 40-hour work week reduced to 32 hours. This allowed the business to save millions of dollars, not have to cut a single employee due to the economic tightening, and most importantly, maintain the level of service expected at Wynn’s luxury hotels. “We don’t want anybody on unemployment here or without insurance,” Wynn stated. This bolstered morale and culture and everyone leaned in, even more, to help the business succeed.
Avoid the typical pattern of trying to solve this on your own and communicating a reality that isn’t aligned with your team’s. Dr. Cloud made a critical point: “If your communications reflect how you as a leader feels and are so far from where others are in the moment, it will feel like trying to shake their hand across the Grand Canyon. It annihilates the shared reality and causes the team to shut down.” As a leader, your mandate is to open them up and lead with an emotional state they can relate to.
Remember that there is opportunity in crisis.
This is a simple reminder that most of us live in the world of startups because we found a HUGE problem and designed an aspirin to get rid of that headache. Our natures thrive in this type of environment. Shift your internal dialogue from operator to owner and problem solver. You have this in your DNA, and it’s time to let that voice back out of the cage a bit.
During downturns, things go “on sale.” Equipment, services, and other opportunities present themselves at reduced costs as the dust starts to settle. One of the most valuable opportunities that arise is amazing human capital. Companies will cut and trim. The very talent you have been chasing is now available on the open market. The power of anticipation can work in your favor here if you really apply the first two points. With a very fiscally responsible budget, you can create a small reserve for when that key hire surfaces. If you’ve communicated well and led with empathy and awareness, your culture will attract top-tier talent and you will build your strength while others are just staying above water. ANTICIPATE the opportunities and plan to take advantage of them fully.
Winter is coming — however with proper planning and an optimistic view of this, and the next season, you will weather the storm. You will come out stronger, having built resilience in the toughest of seasons. This is where we can prove to our investors that we have built a season-proof business — the choice is ours.
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture.
Sign up here if you are not already subscribed to our blog.
