Founders’ Perspective: Fewer Economic Doomthreads, More Learning & Action
13 Jun 2022
A few minutes on social media might convince you we’re entering an economic apocalypse. However the barrage of advice from commentators (mainly VCs), must remind us that VCs are not macroeconomists.
In times like this, as a startup Founder & CEO, I make it a goal not to get sucked into the commentary (If you're looking for a summary, check the end of this article). Though I want to read all the thought pieces and decks on the economy, I strive to focus on what I can see and control within my own company.
To limit my media consumption, I fall back on two simple rules when I find a new article:
1. What new information can I learn
2. Will this new information help me make better decisions?
At some point, there is no new information available, and thinking this way keeps me focused on running rebank.
Being action-oriented is how you survive a downturn, so I want to share the steps that we took internally to react quickly. If you don’t have a CFO, then these steps are worth exploring with your team. If you do, it’s important to ensure you’re both on the same page about your financial health.
What should every founder do right now?
Take a financial gut check
Forecast multiple scenarios
1. Your financial gut check
Knowing your financial KPIs will help you set the tone for the next 12-24 months. The basic question you’re asking yourself is: assuming flat growth, can we survive? Here are the KPIs that can help you answer that:
Default dead or alive
Burn multiple (even if you’re not venture-backed this is useful)
Capital needed to get to default alive
Our finance KPIs is a handy starting point for this gut check; it calculates these KPIs with only five inputs.
2. Forecast multiple scenarios
If you have fewer than 36 months of runway, you need to act now. There is no way of telling what might happen, so large companies forecast multiple scenarios, which is also what we recommend doing. Create at least three (if not four) scenarios with varying cost and growth expectations. Discuss these with your team to help you decide your next steps.
What can you do to increase your runway?
There are only two levers you can single-handedly pull: revenue or costs.
Possible revenue solutions include:
This is our least favourite option. Unless you have strong product/market fit or a great acquisition funnel, this is risky until you know what the bottom-end of this downturn will look like for your business.
Improve payment terms
It’s hard to predict if anyone would agree to pay upfront, but if your customers are large corporations (especially in counter-cyclical industries), they may be willing to hear you out. Offer a discount.
Alternatively, possible cost-saving solutions include:
Negotiate for better margins
Look at every item in your cost of sales; it’s a great time to re-negotiate vendors, whether software providers, contract labor, or something else. This might be tough, but well worth it if you have a strong negotiator in your team.
Decrease costs, including salaries
A pay and hiring freeze is strongly recommended if you’re concerned about your runway. The other large outgoing is probably payroll, so you should consider pay cuts. If you are going to do it, act now and do it decisively.
The scary thought is that you may need to do layoffs, and if that is the case you need to act fast. Cutting deeper than you think will mean that the team you keep will have a better chance of surviving through the worsening climate.
Here are the main points you will have probably heard by now together with how to plan for each potential reality.
It’ll be (n) years before things return to normal
Will this be an L-shaped recovery or a V-shaped recovery (read: long or short). Depending on whether you’re reading an article about the public markets or private markets you might hear different stories, both can be correct.
Model out 3 or 4 scenarios with your team and consider the worst.
"This is the worst recession since…"
No one can tell you how long this downturn will last, some are likening it to the 2001 dot-com crash, others to the 2008 global financial crisis. This is not a topic you want to spend brain cycles on.
Fine-tune your acquisition and monetization metrics, and review them weekly so you can react to any sudden changes.
"This is the beginning of bad times"
When sentiment is negative, you’d do well to cover your downside risk first (read: make sure you’re not going to die). Once you’ve done that though, the real way out of a recession is through growth.
How are your customers dealing with this new reality? What can you do to use that to drive growth?
It’s going to get harder to raise venture capital
The power-law distribution that exists when it comes to fundraising will feel worse. Yes, there is a lot of dry powder, but some VCs will have to make fewer calls for that capital and therefore make fewer investments. It is pretty much accepted that growth-stage companies will be hit worse than early-stage.
Assess a scenario where you don’t raise and get to default alive
Valuations will be lower for those that do raise
Because multiples have gone down for public tech companies, the range of acceptable multiples for private companies will definitely go down. Valuation negotiations will be harder so you need to figure out what this means for you RIGHT NOW.
Assess a scenario where your next valuation is less than 3x