Thread
I’ve talked to a bunch of Founders over the last 6 months about how to operate through an extended downturn.
The punchline: it will be hard, but acting swiftly is going to be the difference between whether or not you survive.
Here’s the framework I am using at my company:
The punchline: it will be hard, but acting swiftly is going to be the difference between whether or not you survive.
Here’s the framework I am using at my company:
First, let’s face it. This sucks.
- Stocks are getting absolutely pummeled
- Inflation is at all time high
- GDP growth was negative this past quarter
And we still have persistent geopolitical uncertainty.
- Stocks are getting absolutely pummeled
- Inflation is at all time high
- GDP growth was negative this past quarter
And we still have persistent geopolitical uncertainty.
@DavidSacks had a great tweetstorm last month sharing investor sentiment hasn’t been this negative since the dotcom era.
At this stage, whether or not we get a recession - in some sense - is a moot point.
Behavior has materially shifted and it’s time to adjust to a new climate.
At this stage, whether or not we get a recession - in some sense - is a moot point.
Behavior has materially shifted and it’s time to adjust to a new climate.
I have a lot of empathy for teams that are trying to do this on a dime.
We were forced to in 2016 when we were going out for our Series B and couldn’t do it.
We had a fledgling startup with a big idea. We were hovering around $1M in ARR and went out to raise our B.
We were forced to in 2016 when we were going out for our Series B and couldn’t do it.
We had a fledgling startup with a big idea. We were hovering around $1M in ARR and went out to raise our B.
In the midst of our fundraising process, SaaS tumbled by 50% and the entire fundraising market shifted.
The next round used to be about vision and narrative. Now it was about revenue and unit economics.
Ouch. It’s a lot harder to hide behind the latter than the former.
The next round used to be about vision and narrative. Now it was about revenue and unit economics.
Ouch. It’s a lot harder to hide behind the latter than the former.
We couldn’t raise a B, got a bridge from our existing investors, swam along and soon thereafter got acqui-hired.
There was a good lesson in the tail end of the journey that I’ve carried with me since:
Never be at the whim of the capital markets.
There was a good lesson in the tail end of the journey that I’ve carried with me since:
Never be at the whim of the capital markets.
@paulg wrote a great post years ago on being “default alive.”
The premise is simple.
After operating for ~1 year, ask yourself:
If you are default alive (you can become profitable on your existing runway) or you are default dead (you can’t and are reliant on investors).
The premise is simple.
After operating for ~1 year, ask yourself:
If you are default alive (you can become profitable on your existing runway) or you are default dead (you can’t and are reliant on investors).
Being default alive is very powerful - you’re in control.
You have unlimited runway.
It doesn’t mean operating is any easier. Operating through pullback is *really* hard.
But being default alive means you can see light at the end of the tunnel.
You have unlimited runway.
It doesn’t mean operating is any easier. Operating through pullback is *really* hard.
But being default alive means you can see light at the end of the tunnel.
Regardless of what type of business you run, the best operators in my experience all have the same grounding:
They are prudent capital allocators and have a good sense on how to balance growth / downside risk.
They are prudent capital allocators and have a good sense on how to balance growth / downside risk.
This is going to be an environment that forces a lot of restructuring.
For those that survive ultimately you will be a healthier company.
Here’s a basic framework I would consider using if you’ve raised money / are default dead:
O-O-D-A:
Observe. Orient. Decide. Act.
For those that survive ultimately you will be a healthier company.
Here’s a basic framework I would consider using if you’ve raised money / are default dead:
O-O-D-A:
Observe. Orient. Decide. Act.
I. OBSERVE
How much did you just raise and at what valuation?
Ok now chop it by 40-70%. That’s likely your real valuation based on new marks.
It’s important for morale to avoid a downround. Flat rounds aren’t great, but at least nobody is underwater.
How much did you just raise and at what valuation?
Ok now chop it by 40-70%. That’s likely your real valuation based on new marks.
It’s important for morale to avoid a downround. Flat rounds aren’t great, but at least nobody is underwater.
Ask yourself what it’s going to take to get back to this valuation on your cash in the bank.
Having an aspirational plan is great, but try to keep this as realistic as possible.
The market could bounce back or it could get a lot worse. Better to plan for the latter.
Having an aspirational plan is great, but try to keep this as realistic as possible.
The market could bounce back or it could get a lot worse. Better to plan for the latter.
II. ORIENT
Translate to tangible metrics.
You have a viewpoint in your head of where the company needs to be.
You need to now put this in a language that each core team understands.
Each team should have clear and revised metrics that line up with this new northstar.
Translate to tangible metrics.
You have a viewpoint in your head of where the company needs to be.
You need to now put this in a language that each core team understands.
Each team should have clear and revised metrics that line up with this new northstar.
III. DECIDE
There’s a bunch of tactical questions / decisions to take to accomplish metrics. They are all obviously business-specific.
Here are some universal thoughts that would be on my mind regardless of what type of company you run:
There’s a bunch of tactical questions / decisions to take to accomplish metrics. They are all obviously business-specific.
Here are some universal thoughts that would be on my mind regardless of what type of company you run:
- What is absolutely essential vs. nice to have?
- Which customers are coming up for renewal?
- What's the health of our pipeline / how has it shifted?
- Which vendor contracts are coming up - how do we optimize?
- Which customers are coming up for renewal?
- What's the health of our pipeline / how has it shifted?
- Which vendor contracts are coming up - how do we optimize?
- What's the right org structure for the current state?
- Who are our top performers and have we secured them?
- Am I managing investor expectations appropriately?
- Have I communicated with key partners / built in redundancy for any weak links in my ecosystem?
- Who are our top performers and have we secured them?
- Am I managing investor expectations appropriately?
- Have I communicated with key partners / built in redundancy for any weak links in my ecosystem?
Most importantly - are we managing working capital (cash in vs. cash out)?
This last one is often the one that is most overlooked.
Burn is one thing; working capital is another.
If you don’t manage cash in vs. cash out, everything else is irrelevant.
This last one is often the one that is most overlooked.
Burn is one thing; working capital is another.
If you don’t manage cash in vs. cash out, everything else is irrelevant.
IV. ACT
This is where culture and leadership matters.
If you need to do layoffs, do them swiftly + with clarity.
When you readjust the plan, communicate it with transparency and context.
The worst thing to do in this time period is have ambiguity linger.
This is where culture and leadership matters.
If you need to do layoffs, do them swiftly + with clarity.
When you readjust the plan, communicate it with transparency and context.
The worst thing to do in this time period is have ambiguity linger.
For the remaining team, don't take them for granted.
There will always be a home for great talent.
Reinforce the mission, give a realistic outlook on how you can storm the tide and provide a vision on how the company will be enduring in the long term.
There will always be a home for great talent.
Reinforce the mission, give a realistic outlook on how you can storm the tide and provide a vision on how the company will be enduring in the long term.
However you internalize O-O-D-A for your own context, it’s important that you move fast.
Downturn environments have a lot of foundational layers that linger underneath and then tend to emerge quickly (see: public markets).
As it happens you want to be proactive vs. reactive.
Downturn environments have a lot of foundational layers that linger underneath and then tend to emerge quickly (see: public markets).
As it happens you want to be proactive vs. reactive.
These environments suck. There’s no two ways about it.
Great people lose their jobs and companies that otherwise may have made it fold.
But these environments are long term positive.
They breed resilient and healthy companies.
Great people lose their jobs and companies that otherwise may have made it fold.
But these environments are long term positive.
They breed resilient and healthy companies.
If you can survive, use this as a forcing function to build sustainability and endurance into your company.
It's time to shift back to "building for the long haul" vs. "optimizing for a 10x markup next year."
In the end, the tortoise always wins. Not the hare.
It's time to shift back to "building for the long haul" vs. "optimizing for a 10x markup next year."
In the end, the tortoise always wins. Not the hare.
