Recently, we chatted with some of our veteran founders about what advice they’d give when it comes to dealing with the current downturn. Here is what they recommended:
🗺 “Verify efficiency, but stay the course”
Overview: Seed. Pre-product. Last funding round: $18M seed in March 2022. Founded 2 startups and led Yahoo! Israel R&D.
Grow responsibly. Don’t hire individuals whose roles are not yet defined, don’t grow prematurely (even in a thriving market you shouldn’t do that), concentrate efforts on meeting your next business milestone, but do make sure that you are always aware of the company’s spend. To borrow a phrase from an esteemed Yahoo colleague: ensure “managerial hygiene”: clearly know where you are financially, and what everyone is working on, at all times. It’s like brushing your teeth – doing it daily makes for a good foundation.
If you’ve built a good roadmap with built-in capital efficiency, you won’t need to make too many material changes in this downturn. We haven’t changed our plan – just paying a bit more attention to details and making sure this sense of accountability percolates down to all managers and team members.
📃 “Don’t use templates”
Overview: $50m Series B in Dec 2021. Double-digit $m ARR. Formerly Payoneer’s Chief Revenue Officer, as well as PayPal’s Business Development Director
Don’t use any templates – think about YOUR business. This situation is a trigger for you to rethink everything- starting with your budget. Sit with your finance team and reanalyze your budget line-by-line, make sure that there is the right control when it comes to your spend, and make sure that you’re thinking in a structured way. For many companies, the easiest way to make budget adjustments is to put a line on everything and cut it by 20%, regardless of whether it’s productive or efficient. Don’t do that. Think about it. Deeply.
When money was cheap, if you made a mistake, you could recover and raise more money. Expectations are now very different. If before it was about growth growth growth, that’s not the case anymore. In most segments (of course there are exceptions), if before you were measured only by growth, now you’re measured on additional metrics, like unit economics, your gross margin, etc.
All in all, make sure you have enough cash, make sure that your customers are happy with your product (because if they need to cut, they will cut what brings them stress), but also be optimistic, believe in your business, and know that good things happen to good companies.
🤝 “Find opportunities with customers”
Overview: Series E. Unicorn, valued at $10 billion. 2x founder.
My one piece of advice is to look for opportunities by understanding how the downturn affects your customers. Downturns change your customers’ priorities and represent at times a critical point in their trajectory. This is an opportunity for YOU to help them understand the changing landscape, see the challenges ahead, and help them resolve them. For example, at Gusto we’re now helping our customers extend their runway using R&D Tax Credit (cash from the federal gov’t) and during 2020, we helped our customers get their PPP loans funded to keep their teams employed.
⏳ “Think short-term”
Overview: Seed-stage. $2m in Q4-2021. 2x founder. Previously founded and sold Rocketick Technologies to Cadence Design Systems in 2016.
Focus on short-term goals. In a regular market, companies make plans for 3-5 years. But now, the companies that fail will be those that run out of money, so even if it’ll take longer for you to reach the growth that you want, try to focus on the short term (1 year).
Look at your plan and ask: what do you need for this next year – everything else put aside. I imagine a situation where I am exactly one year ahead, in June 2023, in San Francisco pitching. What do we need to be good enough at that point? Start thinking backward from this point.
Two of the lessons I learned from starting my previous company at the end of 2008 are:
- When you go for a financing round, don’t overdo the raise or valuation. If you go for valuations that are too high, as it will put the company at high risk because if the bubble bursts, then you are in trouble with future valuations.
- If you’re at pre-seed and just starting off, if you can operate without money, wait to raise. I didn’t take this advice back then. It’s not even about your valuation, but more about your chances of success: when the market is down, investors are not that bullish on new investments and you can bring yourself to negative momentum. Money burnt is money lost forever.
💵 “Check your cash”
Overview: $300m Series E. Unicorn. Last funding round in August 2021. 2x founder. Previously founded and sold ITNAVIGATR to Avaya in 2013.
Check your cash, make sure you have a run rate that is ~18 months, and start thinking about your next fundraise 12 months before you run out of cash. The dynamics of raising capital will be different, and you will need time to adapt yourself to the new “ways” of raising capital. These new dynamics are not defined yet. In the past several years there was a trend of growth. Some people are saying the new trend is profitability, but I am not sure yet.
Whatever it is, founders need to start their fundraising process early in order to understand the new trend that investors are looking for. Don’t assume things, because you can end up wasting months in fundraising, but no cash in the bank.
📈 “Judge based on customers and ROI”
Overview: $22m. Last funding round, Series A in May 2021. 2x founder. Previously founded and sold ForceNock to Checkpoint.
Make your decisions by looking toward your customers and your technology partners, not just the VC’s or the stock market. When COVID began, we heard “don’t spend money, don’t do anything, have 36 months of runway” so I am slightly hesitant to make harsh decisions based on general market ideas alone. BUT, if you hear from your customers that “hey our budget will be tight this year,” then you can make the adjustments you need.
In general, you need to judge everything based on the ROI that you’ll get from that spend, renegotiate with vendors with a revised budget, and do what you can to push down the costs for all departments. It is a good exercise also to map what can be cut/reduce and understand what would that mean to the business. For example, immediately when things went red, we went back to the drawing table to re-plan the H2-2022 expenses and hiring.
We recognized in advance that 2022 will be “different”, so we split up our budget approval process. We prepared an H1 budget and now we are prepping H2. And I learned this the hard way. In 2008 I buried a company; we were after ideation, had initial traction, and had a small pre-seed but couldn’t raise seed. We had revenues and could have survived by bootstrapping if we had gotten the right advice to make our cash last longer. Lucky for us, we’re coming into this crisis with more knowledge than in 2008.
🏔 “Don’t make decisions out of fear”
Overview: Public. IPO’ed in May 2019. Previously founded two startups.
Stay calm and carry on, it’s important to stay level-headed and not make decisions out of fear. Assess the current situation and build multiple scenarios while planning for the future. Think through both business opportunities and challenges, there can be both in a downturn. Invest where it makes sense and trim the fat where possible, and more than ever cash is king! Finally, have a bias to action. Make decisions and take action, there is often more risk in doing nothing.
🔎 “Concentrate on value”
Overview: Founding team member and executive of five companies. 2 exits + 2 currently active (Anchor and Omnix Medical).
Startups are businesses just like any other business; you should use this as a wake-up call to focus on the value you’re providing your customers and put the fluff aside. We asked ourselves, what do we need at this stage? We need to get to our revenue mark- that is the goal of the company- so anything not contributing directly to profitable ARR is out. You need to know what the ACTUAL next goal is of your startup and anything that doesn’t contribute directly to it should be considered fluff and needs to be reconsidered or left out.
For some companies their goal might be finding product-market fit, for others, it might be closing design partners. For example, a pre-seed startup that doesn’t yet have its market fit, shouldn’t spend its money on PR, they should be using that money on product-market fit. Get customers to say “yes, I want to buy this.”
In 2011 (Black Monday fallout), I had a consumer app that had a lot of users but no real profit. When the market crashed, many companies started to close because “eyeballs don’t make money”, and when people wanted consumers to pay for apps, they walked away. The fact that millions of people “see” your product doesn’t mean that people actually find real value in it. That’s why I am all about profitable growth from the start. Value, profit, no fluff, and focus.
📊 “Understand your inputs and outputs”
Overview: $125m Series G. Last funding round in February 2021. $3B in AUM and 6M+ customers.
My advice to other founders is relevant no matter the circumstances, but particularly now. It’s so important to really understand the inputs and outputs of your business model. Focus on accountability and driving performance on the fewest major items that will have the biggest impact. Remove the noise. If you can achieve this, you will be able to accelerate and make step-function gains as the market stabilizes.