Three Tips to Help Startups Thrive Through an Economic Downturn
Covid, Funding winter and now the Silicon Valley Bank crisis. Most Founders & CEOs, especially those of in the startup world, are grappling with the new realities of running a business during an economic downturn. The long-standing directive to grow at all costs is now a thing of the past. Today, profitability is king.
We must lead differently than we have over the past few years. We must inspire trust, confidence, and certainty during very uncertain times. However, many leaders are now executing seemingly knee-jerk reactions and course corrections. Rather than establishing calm, they’re fueling instability and mistrust inside and outside of their organizations. There are better ways to do this.
For me, as an advisor working closely with growth-stage companies, it’s not just about helping the companies survive, it’s about using this time as an opportunity to step back, ensure they are positioned to thrive and come out stronger on the other side. I’ve had a front-row seat to the rise and fall of the technology industry over the past two and a half decades — from the dot-com bust to the Great Recession to today’s SVB crisis. With that perspective, I’ve come up with my own formula for leading through a downturn.
Here are three core pillars of that formula — that may be helpful for other startup leaders.
1. Rethink every aspect of your business model
Take a step back. Are there revenue streams you haven’t opened up? Are you missing out on critical market share because your prices are too high? Is your pricing model designed to scale with customers based on the value they’re receiving? When rethinking a business model, it’s important to start by analyzing the current model and identifying its strengths and weaknesses. This can involve conducting market research, analyzing financial data, and gathering feedback from customers and stakeholders.
Once you have a clear understanding of the current business model, you can start exploring new revenue streams and pricing models. This might involve experimenting with different pricing structures, such as subscription models or usage-based pricing, or exploring new markets or customer segments.
It’s also important to consider how your business model can be designed to scale as your customer base grows. This might involve automating certain processes or investing in new technology to improve efficiency and reduce costs.
Ultimately, the key to rethinking your business model is to remain open-minded and willing to experiment. Don’t be afraid to try new approaches and learn from your mistakes along the way.
2. Operate as if you will never be able to fundraise again
Over the past few years, access to capital was relatively easy. Even during the pandemic, investors were funding startups at all stages. Valuations were growing, and rounds were getting bigger and bigger.
But now that seems to be grinding to a halt, with global venture funding in January down 50% year over year. It’s unclear how long this slowdown will last, which means CEOs must operate as if they will never be able to fundraise again. Because it’s possible they never will. Even when the economy recovers, investors may remain shy for many months or even years, waiting to see when it’s safe to deploy their capital again.
Money in the bank is like gas in your tank. If you don’t know where the next gas station is, it’s time to start walking. Protect your runway. Reduce costs. Get to cash-flow positive if you can. This means understanding your cash inflows and outflows and making strategic decisions about spending to conserve cash. Focus on reducing expenses, negotiating better payment terms with vendors, and exploring new revenue streams.
3. Share more, not less
Most companies become more secretive when facing uncertainty. Internal communications go dark. Public relations slow down. However, leaving your employees in the dark just breeds more fear, uncertainty, and doubt. These feelings lead to reductions in productivity and the erosion of cross-functional relationships.
Companies need to be communicating even more regularly first with their employees. Give employees insight into your strategy, your logic, your optimism, and even your reservations. Earn their trust and show the commitment you’re asking them to show you. Then, it’s more important than ever to build strong relationships with your customers, suppliers, and partners. Be transparent about your business challenges and work collaboratively to find solutions. Focus on delivering exceptional customer service and building loyalty through personalized experiences.
Now is the time to be vulnerable, transparent, and honest.
At the end of the day, be the CEO you’d want to have
Way too many CEOs and VCs simply copy what other companies are doing without taking a step back to really think through their unique situation. We’re seeing this en masse in the tech industry around layoffs. Yes, layoffs quickly cut costs, but they have a lasting negative impact on your employees, brand, and customers.
There are of course instances where a business can’t possibly survive without layoffs. In that case, it is truly a necessary evil. But far too many leaders today are choosing layoffs without fully exploring other options. Finding those other options starts with critically thinking about your business model and how else to cut spending. And, once you’ve done that thinking, open up the lines of communication with your employees to get everyone on board.
Ultimately, it all comes down to one question: Are you leading like the CEO you’d want to have right now?
Overall, the key to thriving through a downturn is to remain focused, adaptable, and customer-centric. By prioritizing cash flow management, pivoting as needed, and building strong relationships, startups can weather the storm and emerge stronger on the other side.
Read more stories like this by subscribing to The WikiMonday Bulletin.
