The average duration of a recession has dropped from one and a half years to 11 months in recent decades. While this is a favorable development in itself, there is one important consideration at play here: according to CB Insights, the median duration between funding rounds for tech companies is 12 months for Seed to Series A and 15 months for Series A to Series B.
This means that, even in a best-case scenario of a cash injection coming in right at the beginning of the recession, startups will still have to stretch their runaway over much of a financially turbulent year. Coupled with a murky outlook for a timely additional round, it becomes clear that entrepreneurs must react to stave off a potential disaster.
So here is our handy guide of precautionary measures to help you navigate the economic downturn.
Extend your Runway
Even on normal days, entrepreneurs have a tendency to mismanage their runway – that is the length of time a company can survive if its income and expenses stay constant. Your revenues will almost inevitably falter, so monitor and control your expenses religiously.
Make sure to cut down costs wherever possible without jeopardizing your business. Compromises are inescapable in this scenario, so choose wisely. Perhaps you should move to a shared office space, hire part-time, revise salaries and compensate employees with performance-based bonuses, make due with a more affordable internet package, skip office lunches, reduce phone bills, and so on. At the same time, you should be looking to automate tasks in a strategic manner. Automating invoicing for example will allow you to redirect resources away from such a menial task to more pressing needs.
But more importantly, start looking for a cash injection immediately. Granted, trying to raise money in such circumstances won’t be easy, but now is the time for drastic measures, especially if your company is in the process of scaling. Raising money is a long and tedious process, so make the most out of it by asking for enough funds that cover a buffer period in case things awry. Investors are much more likely to listen to you and extend you a bridge if you are well prepared and honest about the road that lies ahead, which is why, in addition to managing your expenses, you should also…
Protect your Revenue Streams
Optimally, you should be looking for revenue streams and customer bases that are less affected by the recession and fine-tune your offering accordingly. For B2C startups, this means targeting wealthier consumer segments. If you’re a B2B company, it means shifting your focus to larger companies since they are typically less affected by economic fluctuations than smaller ones.
And if you’re lucky enough to have businesses that need your products or services for survival, place extra care to retain them.
There is no better way to protect your revenues than by making your services indispensable to customers. Truaxis, a US-based company that marketed credit and debit cards for banks, pivoted to helping banks address churn once the recession struck. “Our revised offering yielded a tremendous ROI for banks — a 10X increase in profit. Our product also became the cornerstone to their online consumer banking experience,” explains Truaxis’ founder, Schwark Satyavolu.
Create a Crisis Committee
The effects of the crisis will, to varying degrees, spread across the whole organization. Business processes are inherently interlinked, so it will be just a matter of time before one affected process infects others. This is why clear and timely communication is paramount.
Hold regular meetings with select members of your management and staff to assess and contain any issues in your organization. A diverse and cleverly selected committee that covers all the critical facets of your company could even help you anticipate issues that might arise. These meetings should be designed to allow you to plan and prioritize key risk areas.
Furthermore, don’t shy away from seeking help. You are not alone in this. Reach out to your peers, they are likely to be going through similar problems. Their insight could save you a lot of time and effort. Reach out to mentors and coaches. It might be even wise to spend on expertise and consultancy services. The payoff could be worth your money.
Keeping your employees committed and motivated is more important than ever, yet equally challenging. But keeping your staff in the dark in such critical times will only sow confusion and concern which would undoubtedly negatively impact their performance. Furthermore, if secrets leak within the organization, as it typically does, the consequences can be catastrophic.
Make no mistake. This is as tricky a situation as you will face. Never hide facts, but the level of detail that you should share will very much depend on your judgment. But you owe it to your staff to always be truthful and upfront.
Lead by example and never hide. Optimism may be scarce, but maintaining a serious yet positive spirit will go a long way in maintaining a constructive attitude among employees. Whether you like it or not, your attitude will to a great extent trickle down to the rest of your company.
We’ve already mentioned in the previous point that you can’t afford to hide, and the same applies to your company. People’s focus naturally shifts and shrinks during troubled times, this is why it is perhaps more important than ever to be ‘out there’. Don’t allow your brand to be drowned out by the noise. Your customers, partners, and even investors need to know that you are alive and kicking.
Issue announcements and updates regularly, seek speaking engagements, develop fun social media campaigns, create a newsletter… The recession will inevitably end, and by that time, not only would you have survived the crunch, but you may have very well leapfrogged the competition.