A new normal for startups: How to handle a slowdown when your BAU is hypergrowth
Startups are defined by fast growth and ambitions of world domination. But COVID-19 means founders have had to quickly shift gears into survival mode.
Last week, Square Peg Capital founder Paul Bassat sent a letter to the VC firm’s portfolio companies, following up on an earlier communication in early-March.
In the letter, Bassat praised the founders for their “agile, resilient, decisive, empathetic and calm” approach to the crisis.
However, he noted that as we look ahead to the next few months, “the level of uncertainty is incredibly high”.
“Our advice is that today is a time for caution, even a dose of paranoia, and tomorrow will be a time for boldness.”
Traditionally, paranoia isn’t exactly the number-one desirable attribute of an entrepreneur.
Founders are defined by their ambition, their super-growth and their mindset of rapid world domination. That’s the boldness Bassat said they have to put to one side for the foreseeable future.
“In the immediate term, we think that decision-making should be based more on worst-case scenarios rather than more optimistic forecasts,” Bassat wrote.
“Given the rate at which the situation is evolving, we encourage you to regularly update these scenarios. Our guess is what will look like a worst-case scenario today may not look like a worst-case scenario next week.”
In the new world of COVID-19, founders are having to change the way they work, the way they manage their teams, and the way they run their businesses. And they’re having to do it quickly — the economic forecast grows more dismal by the day.
Many have seen their growth plans — especially international ones — screech to a halt. Or, more accurately, they’ve seen a rapid slowdown, and they’re trying to decelerate everything without stopping altogether, and collapsing as a result.
Instead of striving for growth, they’re suddenly striving for survival.
Bede Moore, managing partner at Antler Australia, tells SmartCompany this period of downtime provides an unexpected opportunity for startups to “put their house in order”.
Having launched in Australia this time last year, Antler is working with the startups that came out of its first cohort, with founders seeking their first funding rounds and picking up speed in their respective markets.
It’s also dealing with a brand new bunch, who started their entrepreneurial journey in January.
“If you’re anything like the startup founders we work with, you would have spent the last couple of months saying things like ‘I wish there were more hours in the day’,” Moore says.
“Well, now might be the time to tackle these things, while still focusing on what drives the company forward.”
So, as founders and CEOs try to get their heads around the changing world they’re operating in, what exactly should they be doing not only to keep their heads above water, but — dare we say it — come out of this crisis stronger?
Cash is king
First and foremost, startups need to make sure they have enough dollars in the bank to last this out. The consensus seems to be that a two-year runway is the minimum businesses need to have in the bank.
But, if you don’t have that, those dollars might not be as hard to come by as you would first assume.
Speaking to SmartCompany, Standard Ledger founder Remco Marcelis notes there are a few Aussie VCs who have closed significant funding rounds themselves over the past few years.
“VCs are actually pretty cashed up at the moment,” he says.
“If you have got investors around, try and secure more cash,” he advises.
“If you haven’t already, start talking to them right now.”
At the same time, that liquidity won’t last forever.
In his letter, Bassat said most of Square Peg’s portfolio companies don’t need to raise in 2020. But, those that were planning rounds in 2021 might be wise to think about bringing them forward, or trying to extend their runways to tide them through a little longer.
Andrea Gardiner, founder of early-stage VC firm Jelix Ventures, also tells SmartCompany that a lot of Aussie investors have “quite a lot of dry powder they will deploy now”.
“But that might run out in a year.”
At the same time, it’s possible that VCs may be less willing than usual to invest in new startups, saving their cash to support their existing portfolio.
So, Gardiner advises founders in the middle of a funding round, or those about to embark on one, to crack on.
“A lot of people would say don’t do it.
“But I think it’s even riskier not to. Once you run out of cash, you’re dead,” she says.
“But don’t assume that the fundraising plans will work out and that your previously expected valuations will be readily available,” she warns.
At this stage, founders have to be flexible. Any additional capital now could determine the very survival of the business.
“It’s disproportionately valuable,” she says.
For those startups that already have investors, Gardiner reiterates the importance of having runway of about two years at their disposal.
Here, like Bassat, she too advises against optimism.
“I think it’s really important that they look very carefully at their revenue assumptions, and that they really stress-test them rigorously; that they assume they’re going to miss their targets; that they revise their projections downwards and then down again; and that they contingency plan for the worst-case scenario,” she says.
“Most companies need to have runway for two years, or possibly three. But we don’t really know how it’s going to pan out.”
Be a leader
This brings us to “a really curly one”, Gardiner says. For most startups, one of the biggest costs is headcount.
Startups have to retain their core competencies, and they must still be able to execute. But beyond that, founders may have to start having difficult conversations with staff members.
“As difficult as that can be, it is a time to reduce headcount where the roles aren’t critical,” Gardiner says.
“A CEO’s primary responsibility is to preserve company value for the team and for customers and for investors,” she adds.
“This is a time to be a leader.”
This is a painful kind of leadership. The kind that isn’t as easy as motivational speeches and Friday pizza. Leading a business through a difficult time means making difficult decisions.
Founders have to be focusing their efforts, and their people, on critical work most likely to drive revenue or customer acquisition, “and cut any expenditure that isn’t core to that”, Gardiner adds.
“Now is the time to fight hard and lead.”
It’s worth noting that at the time of publishing, the government’s $130 billion JobKeeper stimulus is yet to be finalised, and the implications for startups are still unclear.
However, whatever subsidies are available, in order to get to that critical two-year runway, many startups will inevitably have to cut staff numbers.
Marcelis suggests, if nothing else, that founders plan for how they’re going to get to that runway goal.
“Start thinking through the scenarios that are going to feel really awkward … they’re often staff-related,” he says.
You don’t necessarily have to act on those scenarios, but it helps to know when it’s time to start making those tricky decisions.
At the same time, kindness and empathy have never been more important.
Gardiner stresses that this crisis is, first and foremost, a humanitarian one.
“People are paralysed with fear,” she says.
“They’re stuck at home, they’re constantly checking the news and social media, and workers are worried about job security … I think it’s really important that startup founders and CEOs prioritise communication.”
Leverage opportunities
At the same time, for many startups, there are opportunities here. Many are already pivoting their business models to help support remote work, or to help with healthcare and recovery efforts.
But even for those who can’t, there are always things to be done.
“It’s really important to invest as much time as possible in customers,” Gardiner says.
“It’s possibly an opportunity in some circumstances.”
Moore adds that founders might use their new-found spare time to improve buggy features, work on user experience, or properly prepare for the next spurt of growth.
“Hard times are great at increasing efficiency. Take this opportunity,” he says.
Moore also advises all business owners to stay on top of the financial support that’s available to them, and to take advantage of them.
“As the days roll on, new benefits and financial assistance for startups and sole traders continue to be announced. The money is there to create growth, take advantage of it.”
This is especially pertinent advice for those in the very early stages of business, such as Antler’s most recent cohort — businesses that are mere months or weeks old. These are potentially the startups in the best position to pivot, and those that could emerge strongest.
“We know that new businesses flourish during economic downturns,” Moore says.
Marcelis echoes this, noting that Aussie giants Atlassian, Campaign Monitor and Envato were born during a time of adversity.
“Aussies are pretty good at creating something from nothing,” he says.
“We’re used to doing things on the smell of an oily rag. That’s the sort of mentality we need to get back to.”
First, focus on survival. But, it’s worth considering, what the world will look like on the other side of this, Marcelis muses.
“Can we get ready to slingshot our way out of this?”
Roll with the punches
All of our interviewees acknowledged that moving from a fast-paced, buzzy business environment to an economic crisis can be jarring at best, and completely terrifying at worst.
The switch to remote working also has a profound impact on mindset and team dynamics.
Moore advises founders to be as transparent and authentic as possible at this time; to be vigilant with communication, and empathetic.
“Being a good leader in times of crisis is more defining than being a good leader in almost any other scenario,” he says.
“This is the time your values stand out and you show who you truly are.”
But, at a time when your business is facing a potential existential threat, that’s perhaps easier said than done. Tensions are, understandably, high.
“It’s a balancing act,” Gardiner explains.
“Things are changing all the time.”
But, even before all of this hit, the whole ‘growth-at-all-costs’ approach to startups was losing its credibility.
Gardiner points to the WeWork saga and other cases of way overblown valuations that “kind of discredited that”.
While growing fast remains a traditional characteristic of a startup, it’s not the be-all and end-all.
Right now, in order to survive, founders should be more concerned with agility and flexibility. They have to roll with the punches, no matter how unexpected they are or the form they take.
It might not be easy to change your business model and your mindset within a matter of weeks.
But, frankly, it’s not a matter of choice, Gardiner says.
“It’s just ‘needs must’. If you don’t do it, you might die,” she says matter-of-factly.
“Fight hard and get through it, or die”
The most successful startup founders are the ones that can pivot where they need to — that can flex with changing economic landscapes and changing markets.
“We invest very early, and that’s a characteristic we look for in our founders,” she adds.
“It’s those that are really rigidly stuck in what they’re doing, and can’t change with changing conditions that will struggle.”
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