How to prepare for the coming startup storm
I’ve been doing this “startup thing” for a while — let’s say since the mid-90s. In this timeframe, I’ve seen a number of ups and downs — some big and some small. On the “fun side” of the equation, the late 90s and the past 3 years … on the “not so fun side”, the dot com crash (early 2000–2001) and the great recession (2008–2009).
The weather just took a turn for the worse and the storm is moving in fast.
Of course, a number of people like myself have been forecasting this for some time. I’m not talking about the “bubble” talk we’ve heard for many years now, although it’s part of it. For the past six months, I’ve had this general feeling that we’re at peak startup (not just valuation, although that has driven it) and it only goes down from here. The private markets always quickly follow the public markets and then it’s game on. And the “unicorn” startup phenomenon hasn’t really helped things at all.
Mark Suster recently posted a good piece titled “The Resetting of the Startup Industry” around the empirical evidence around what’s happening with valuations and multiples. If you want to understand some of the technicals, this article will explain it.
If you’re a startup founder, what do you do?
I’ll try and give some advice based on my own experience riding the storm out through several of these cycles. I survived only one of them.
Obviously, each startup is different and the circumstances of each cannot be generalized. My guidance is really based on unprofitable early to late stage startups. You may need more or less (or none) of what I’m recommending depending on your own situation. So use caution as you proceed. However, I generally think this is good hygeine when you want to “get indoors and be safe while the storm passes”.
First thing you should be looking at — and the most dire — is your finances.
I would immediately freeze all planned future increase in spending. If you have 5 headcount you plan on hiring this month, stop the process entirely. Don’t hire anyone.
If you planned on starting to look for new space because you’ve outgrown your existing space, call the brokers and put it on indefinite hold.
If you really need to upgrade some laptops for your team, tell them that they’re going to have to make do for right now.
Stop. Spending. Right. Now.
You and your CFO should immediately assume that you will need to live with whatever you have in the bank for the next 12 months (at a minimum, ideally longer) — assuming conservative revenue assumptions.
If you don’t have the runway with your current burn (excluding all the new spending you just cut above), then you now need to take immediate action.
If you’ve already raised venture money, you should immediately call each of your investors and have a frank 1:1 discussion about doing an immediate funding round. Trust me, all the decent VCs are already game playing this out with their own partnership and trying to circle their own wagons around their portfolio. They are also looking at which of the “strongest will survive” so you better be having this discussion with your partner right now. Each partner will drive this point of view inside their own firm and you better make sure you have a plan and are on the priority list. Make sure that you talk with each of your investors and let them know (a) you’re working on an immediate change in your current operating plan to ensure you have enough runway and (b) you need their help and commitment to make the plan work. Expect to be flexible in how this is financed — you should not care at this point. The primary goal is a flight to safer ground. If you need to take a bridge note, great. If it’s going to be a flat round, that’s just fine too. Take the money as fast as you can get it and make sure you get enough.
If the storm passes and it ends up that the prediction was overstated, you’re going to be in an even better position. If the storm is worse than predicted, you’re going to have a much better chance of surving without as much damage. Screw this up and your startup will not survive.
Secondly, as part of your finance plan, you need to take a hard look at your priorities.
What can you stop doing that you are doing right now? If it’s not core to the mission and not going to drive immediate short-term revenue (<6 months), stop doing it right now. Put it on hold.
If you have some new, cool feature that you think could be interesting but not sure if it will have a long-term impact on revenue, CAC, etc., put it off for right now.
Make sure you’re buttoned up on your core revenue engine and have all hands focused on that. Re-evaluate all non-essential activities in your business.
If you didn’t have everyone 100% focused on revenue (including R&D), you better make sure that’s the case now. Make sure you really take care of your existing customers. Make sure you focus on your sales team and what they need to sell. Make sure everyone is now clearly understanding that revenue is going to be the priority over everything else in the interim. Growth at all costs doesn’t work right now, it’s now about survival.
Thirdly, now that you know you have your core priorities, look at your people.
This is by far the most brutal and inhumane part of the process. But it will be necessary to survive.
Hopefully, you’re not overweight with extra resources after looking at your priorities. But based on the past 2–3 years, I doubt that very much. You’ve likely got extra resources doing things that have now been deemed not a priority in the interim.
Now you’re going to have to ask yourself: how can I live with less people? Do I absolutely have to have this person to survive.
Make a priority list. Rank each team member by the following: (1) must have or we cannot run the business (2) really need to have them or things start to get difficult (3) nice to have but in a worse case could live without and (4) extra.
This is going to be the most difficult part. If you’re in a startup, everything single person matters. You’re not some big, insensitive and inhumane corporate machine. These are likely all people you personally recruited and personally committed your time and energy and emotion and they are part of your family. But, you’re going to possibly cause badness for everyone if you don’t make the hard decisions before the weather is really bad and you no longer have time.
What you do the list will greatly depend on your situation — mainly your burn rate and the cash in the bank and your financing plan. However, with this list, you’re going to be able to have a rational and financial way to evaluate your situation with the least amount of emotion doing it.
But be prepared that if you’re going to ask your investors to bridge you through this round, you’re going to have to make some hard decisions. If you stopped hiring and you can get cash flow break even in one or two quarters, maybe you’re OK by doing nothing or only cutting some of the “extra”. However, my guess is that the vast majority of startups will need to at a minimum do 3–4 above and some will have to do 2–4 to survive. But rule of thumb, do more than you think you need to do. I know it sucks. I’m feeling for you right now. I’ve been down this road before and it’s awful.
As part of making the list, one thing you should also consider is the people you think are there to ride out the storm with you. You want to try and avoid the situation where you have a person on the (1) list but they’ll leave you anyway. Use your gut here. Will she stick it out through thick and thin to get to the other side of the storm? The worse feeling is cutting someone you really need over someone else you really need to then find out the person you kept left anyway.
Now you gotta execute get everyone on your board and your team inline with this plan. Hopefully, if you’ve got a good internal plan backed up with a financing plan, you’re going to get ahead of this. You should probably execute as fast as you can. You’re likely burning away good cash right now that you’re going to wish you had in 3 months. Trust me on this one. You can be wrong on it and have more cash and turn up the spending very easily and very quickly if so.
The goal for every startup founder right now should be survival.
I know this might sound dire, but it very well could be the difference between life and death of your startup. The storm is coming. We just don’t know how bad it will be or how long it will last. Get indoors for now.
Good luck and see you on the other side.
What if you haven’t yet raised or you’ve raised only a seed round?
This is a tricky one to answer right now. I would assume that you are not going to raise any money this year. Almost all investors right now are focused on their current portfolio. That’s not to say great companies won’t get new financing or that the venture market is completely shutdown. But, it’s going to be a little distracted for the next few quarters.
If you cannot survive with no additional capital, then you might have to find an alternate path. Can you do services revenue? Can you get a full-time job and still keep working at it on the side (for small startups this could work, impractical for most)? Can you take your early customers and cut some sort of sweet heart deal with them? You’re going to need to use that entrepreneurial spirit to get creative.
Some of the best companies that have been created thrived in these situations (Google as an example). The best startups really execute well given the reduction of the competitive playing field. Tables shift and people get much more laser focused on execution during these periods.
I don’t believe the coming storm is likely as bad as the dot com bust or the great recession, but it very well could be. There are some vary challenging secular issues in the economy and the path forward is tricky right now. But startups are driven by capital markets and capital markets are driven by the public markets — especially the equity market. And right now, even great public market companies that are executing well are getting pulled down by the overall market sentiment. It’s going to take time for the system to work through all of this and get back to something more stable. And in these situations, that takes some time.