“This is not a time to panic. It is a time to pause and reassess.”
This is one of the most common pieces of advice given regarding the current market tumult and ongoing macroeconomic pressures. Startup founders are worried, confused, wondering whether they should change their plans around spending, runway, hiring, product, and funding rounds. There are numerous articles and resources on the topic already out there from other venture capital funds. We felt it would be valuable to bring our community together, give our two cents and build upon what has already been said by other VC’s, and what it means for you and the road ahead as a founder.
But first, a very compact version of the most popular advice that we have heard and read so far (you will find links to some very useful content pieces by other investors at the end of this article):
- Conserve cash, extend runway, do the cut exercise, and be reasonable with hiring – shift from focusing on growth to focusing on efficiency;
- Adjust your valuation, control your burn multiples, and build scenario plans;
- Recognize the changing environment and look at this as a time of incredible opportunity;
- If you plan to raise money in the next 6-12 months, you might be raising at the peak of the downturn, and chances of success are low;
- Save team morale and have a positive state of mind;
- Those who used the time of crisis to prepare will be the big winners.
Here are the several points that we want to put an emphasis on.
We need more context of the general purpose advice
The tricky part about most of the “navigating during turbulent times” advice out there is that it is general purpose advice. One example is that the panic and call for quick action (like fire 30% of your staff), is not applicable and not very healthy for all founders.
It very much depends on the stage of your company. Are you just starting? Are you after your pre-seed round? Or Series A? Because if you are a company that has raised a multi-million round recently, many of those choices would be fundamentally different from the ones for a company that’s just starting out, without a sufficient runway, and is maybe trying to fundraise a new round.
As an example, for some of our exceptionally well-performing portfolio companies, like Payhawk and Gtmhub, it is the perfect time to acquire other companies or hire even more aggressively. If your pockets are deep, but your unit economics are not great, then you have to focus on slowing down hiring, cleaning up the value proposition, and improving the unit economics (and you can do that without having to cut headcount). However, if your unit economics are bad, you are burning through your cash too quickly, and you have a lot of headcount, then you have an issue and maybe have to think about reducing the number of employees.
Running a tight ship
Cutting costs is another piece of advice that many people stress on. Normally payroll costs are among the most significant ones for a company. If you have to tackle payroll costs, don’t start by firing people straight away but by slowing down hiring first. If that’s not enough, start trimming the payroll costs, but in a more unpopular way – which is to cut down by reducing everybody’s pay, rather than by firing people who are capable. By doing the latter, you should start doing it top down, rather than bottom up. This means reducing the pay of the most senior employees first and trying to protect that of the lowest paid ones, rather than what normally happens, which is the reverse.
This really shows the concept of one strong team that goes through hardships together and where solidarity is more or less proportional to the capability to weather the storm. And when your people see and feel that you care their trust and loyalty become even stronger.
Where does fundraising stand?
The market for good companies didn’t disappear and won’t disappear. It just takes a little bit more time to fundraise and you have to factor that into your strategy. There is still a lot of capital out there and that capital will bet on the future market leaders. The valuations of these future market leaders, the 1% of startups, which are exceptional, wouldn’t change dramatically. All the other ones, however, might be affected and need to be ready for lower valuations. This doesn’t mean that you cannot raise capital – if you have reasonable expectations about valuations and you have a good story and traction, you can still fundraise successfully even in hard times.
This leads us to another point – don’t start high with your valuation expectations. If you can get the money, get the money – don’t haggle about valuations, don’t go into endless debates on terms, don’t be as picky as you would normally be in a different market. Because just surviving a crisis is winning and anything that helps you win or prepare to win is good. Money in the bank at a lower valuation is better than some hypothetical round in the future when your startup could be close to extinction.
If you are raising money, be smart about designing your fundraising strategy. It is important to understand and analyze how your business is growing. If you understand your growth better, it could turn out that in 10 months, you are in a much different shape than today, which might mean that you could have optimized your fundraising better. When structuring your fundraising strategy and needs, don’t do it entirely based on what is the state of the business today, but take into account what will be the state of the business in 12 months. Because if everything goes well, you might need half of the money to achieve certain milestones and so optimize dilution, valuation, and everything else.
Opportunities. Opportunities. Opportunities.
As with every crisis, founders have to be mindful and show discipline. At the same time, they should put their growth mindset in action. Because the greatest opportunities actually arise in tough times. The Formula 1 racing driver and champion, Ayrton Senna, put it very well more than 30 years ago:
“You cannot overtake 15 cars in sunny weather… but you can when it’s raining.”
This is a great opportunity to overtake and you should look with this perspective on everything that is coming your way now.
1. The opportunity of hiring exceptional talent.
If you have funding and you are moving according to plan or better, it is the perfect time to ramp-up hiring and outpace key players in your industry. Many people get laid-off in such times, including really good professionals who wouldn’t normally leave their jobs in corporations and startups. While your competitors are cutting their workforce and battling with all kinds of internal drama just to prepare for survival, you can switch gears and “shop around” for talent.
2. The opportunity of being closer to your customers.
Paying attention to your customers is essential in times of a crisis. If the first priority is your employees and morale, the second priority is your customers. Because usually they are the ones that lead you like a lighthouse in dark times. Serving them better, being closer to them, being empathic to their own problems is crucial. Don’t forget that when the going gets tough everybody is struggling, including your customers. If you need to make a temporary price discount to retain their loyalty, just because they cannot weather the storm as easily as you, do it by all means. Be empathic as much as you can, be supportive, and raise the bar in terms of customer service – this gives you a big competitive advantage.
A great example to point out here is the team of the Kanban project management software company Kanbanize. During the pandemic they showed extreme care and support to one of their customers who was going through tough times. As a result, Kanbanize was one of the very few expenses that this company did not cut, and it literally turned into their biggest advocate stating that they are the best IT vendor they had in their history.
3. The opportunity of learning.
Of course, in the best case scenario you have put in the work to prepare for the crisis in advance during good times – just because someday, three years or three months from now, you are going to have a bad bet.
There is no need to dwell into “What ifs”, but if you were not prepared well for turbulent times you can learn much from the situation and be more prepared for the future. This is something that most of the companies don’t do. They get blindsided by success and by everything going in their favour – in good times everybody thinks they are a great investor, great entrepreneur and a great … fill in the blank. And then a crisis strikes.
The concept of the ancient Greeks about heroics was that the true hero, or a nation of heroes, has to be so prepared so they are not caught by surprise when a crisis comes. And most of the time, they are actually preparing not to have a crisis.
A taste of our own medicine
We haven’t slowed down investing and we do not plan on doing so anytime soon. Exceptional founders in Southeast Europe need exceptional support, so if you are building an exciting tech company in this part of the world in fintech, healthcare, future of food and future of work, reach out to us and let’s talk. In a nutshell:
“WE ARE OPEN FOR BUSINESS!”
Here is a list of resources and advice that we liked on the topics mentioned above:
- Adapting to Endure (Sequoia)
- YC advises founders to ‘plan for the worst’ amid market teardown (TechCrunch)
- The Burn Multiple (Craft Ventures)
- Operating during a downturn (Craft Ventures)
- What’s going on with European startup valuations? (Sifted)
- A framework for navigating down markets (A16Z)
- The upside of a downturn (Lightspeed Venture Partners)
- Lessons Learned from the Last Financial Crisis (LAUNCHub Ventures)