We are not in a recession. But the economic conditions are erratic. At best, they’re dangerously uncertain, at worst, foreboding. This is especially tough if you are a founder in a high-growth startup. Unlike legacy companies, which can economize their way to profit, you are expected to grow while losing money.
For anyone unfamiliar with the venture-funded start-up world, that seems insane. But the name of the game in start-ups is to GROW! That growth is funded through successive injections of funding, not profit.
The Start-Up Paradigm
Given that growth mechanism, when funders become scarce, it may as well be a recession.
In start-ups, financial metrics like burn rate (how much money you’re spending a month), annual recurring revenue (ARR) and runway (the amount of time until the money runs out) are deterministic.
VC money is scarcer now than at any previous time in the last 5 years. So, while it’s not technically a recession, it’s a rough time to fund growth without profit.
This is a dilemma because legacy companies focus on building profitability into their models. They price for margin. They keep costs down to economize.
But start-ups are different. They forego profitability to grow. There’s a whole economic model in the background, but that is unimportant here.
Growing without profit means that without new funding, founders need to do much more than legacy-style economizing. They likely need to do layoffs, stop building and postpone the very plans that justified the investment.
Once you make those cuts you will probably stop growing and the product will languish. But if you can’t paint a glorious vision and justify it with both growth and product how will you ever raise funds?
How should you think about this?
Paradigm Pivot
One client of mine faced this early. She was trying to raise a Series B in late 2021 but couldn’t. Fortunately for her, she had a big enough book of business that she got a loan. That gave her runway. At the time she was furious. I remember her telling me that she never signed up to build a legacy business.
But, she had employees and clients.
Today, the company is making money. It’s not making tons, but it is a viable business and does not need to raise funds for survival. Whew. And wow!
The Dilemma
There are lots of ways to approach this, but what will make the biggest difference is choosing how to think about it. Should you assume that you will resume your path of super-fast growth without regard to profitability at some point? Or should you adopt the paradigm of figuring out profitability immediately?
New Paradigm
There is no perfect answer to this. But, if you choose to aim for independence you will do very different things than if you are waiting out the storm. The profitability choice will mean doggedly pursuing it.
If you expect the problem to be short-term then you need to operate like the ship is sinking and start throwing off dead weight to stay afloat.
The Profitability Paradigm
Start-ups often spend years working on “product-market fit”. That’s a fancy way of saying that they try to figure out who wants what they are selling. They try different target markets, and different variations of the product and use case.
When you decide that profit is the priority, you take all the data and experience you have, and choose the target that you will attack with every ounce of energy. You identify the biggest obstacle and craft a way to remove it.
Once that decision is made, you need to reorganize your team to fit.
Making this kind of decision won’t mean you can avoid laying off people. Unfortunately, whether you aim for profitability or just making it to the next round of funding, layoffs are inevitable.
But the way you make those choices varies. If you are going to aim for profit, then you make investments in selling.
That has ramifications for other parts of the team like product and engineering.
But it’s doable. Plenty of huge companies re-routed to a bootstrapped model and made it. That playbook is all strategy and big bets. Find the biggest roadblock and fix it. If it’s money (it probably is not), then borrow, use your own money, or beg.
- Identify your buyer.
- Invest in your sales engine.
- Keep your product working but slow the roadmap to idle.
The Survival Paradigm
If you are interested in waiting it out until funding, then you need to know just how pessimistic to be. The answer is…. much more pessimistic than you believe you should be. No one moment is markedly different from most others. We all think that our challenge, our company, or our life is unique. But, in the world of probability, none of us is unique. We are data points.
The lack of investment is not unique. Look to history. The Fed says it will be a soft landing, but you must assume we will languish as long as others have before.
In 2009 VC funding dropped by 40%. It took until 2011 for it to recover to its 2007 levels. Even if this economic dip isn’t as dire, it’s wise to assume that fundraising will be tough –valuations lower—for at least 24 months from the onset, last August.
Here’s the playbook for survival:
- Cut ruthlessly.
- Identify the one-way (no backsies) and the two-way (reversible) decisions. Initiative cutting is a two-way decision. You can reverse it in better times. Lay-offs are also two-way. You can rehire those people or others.
- Spending is one-way. When the cash is gone, it’s gone. Don’t spend what you needn’t.
- Identify the critical initiatives. Most are not critical and should be cut.
- Identify your absolute A players. Great people can wear many hats. Choose people, not hats.
- How ever many people you plan to lay off, add 50%. Cut once. Multiple cuts destroy morale.
- Be completely honest with your team –both those leaving and staying. And let the survivors grieve while they work.
It’s not all bad news. But it is a call to arms. Man (or woman) your torpedoes
