10 things you can do to prepare for potential slowdown in 2019

The public markets are continuing to go down, and the whispers of upcoming recession are on Twitter, on Bloomberg, and in the private conversations. The experts are predicting the recession sometime between now, and the end of 2020.

While I am no expert on Macroeconomics, I do know that it is prudent to plan ahead. Everything depends on your particular startup – revenue, stage, capitalization, runway, speed of customer acquisition, LTV, whether your product is a must-have or not – so take the bits here ,and adapt them to your situation

The general framework  is simple – it is a game where you get cash and spend cash and try to not run out of cash.

What are your sources of cash? Customers and investors. What do you mostly spend cash on? Staff and things related to making and marketing your product.

You realize that getting cash in relies on external entities — customers and investors, and so it is not entirely under your control.

On the other hand you should be in control of  how you spend your cash.

So start by optimizing what you spend on ,and then try to increase the cash thats coming into the company.

1. Understand your runway, and create a clear plan

The place to start is your current plan. If you don’t have one, you are in a whole lot of trouble — drop everything, and create one. And, please, don’t create one of those fake plans that founders sometimes put together to appease investors – that won’t help YOU.

You are creating a plan for YOU, so that YOUR company can survive.

In your plan there will be 2 pieces that matter. First is the cash in the bank, and the second is the cash you expect to get from your customers. How certain are you in your revenue forecast? Is your product a must have or a nice to have? Will customers stop buying your product because the times are tough. You need to be extraordinary good at answering these questions, because your company depends on it.

Once you think it all through, decide if you need to make adjustments to your plan, and if you do, do not wait – make the changes now. Next try maximize your runway by cutting the budget and think through when you will need to raise again.

2. Conserve cash, and be scrappy

In general, regardless of where you come out on your budget, switch into a scrappy mode. As a startup, you should be in that mode anyway, but if you weren’t until now, now is the time to embrace that mentality.

Review your bills – what can you cut? There is always extra stuff. Can you reduce your office bill? Can you get rid of snacks or other perks? Just get into the mode of cutting things that aren’t critical. Explain this as a core cultural value to everyone – especially when the times are tougher.

3. Become profitable

If you can become profitable – do it.

Becoming profitable is the absolutely the best thing you can do to gain control of your destiny.

Sure, you may grow slower, but you aren’t going to run out of money. Even if you can’t raise capital, you are able to survive.

4. Delay paying vendors

I learned this trick from one of our CFOs – delay payments to vendors and demand to be paid faster. While this sounds agressive, as a startup, during tough times, you may want to put this into practice.

Negotiate so that you have cash coming in way ahead of the cash needing to be going out.

5. Slow down your marketing spend

Marketing spend is typically big, and often inefficient knob in many startups. Marketing gets a lot of dollars because it drives customers. The logic in the early startups is that we can sacrifice efficiency in CAC, that is, we can overpay, to get customers because when we are at scale we will be able to drive CAC down and LTV up.

Regardless of the merits of this approach, you should seriously consider trimming down your marketing spend. Sure you will acquire less customers and your growth chart won’t look as pretty, but you will conserve cash and will be able to survive longer.

6. Slow down your hiring

Review your hiring plan and trim it. This is an easy knob to control. Sure, it means that you will grow slower, and people on board will have to do more work, but this is a good thing to do.

Imagine hiring at the same pace, then running out of cash and having to let go people who you just hired. Thats not unheard of in the startup land. Don’t be one of those founders, slow down your hiring.

7. Do Layoffs

This is obviously the toughest one of all cost savings moves, but, if necessary, you should be prepared to do it. If you hired too quickly, and the revenues aren’t where they are should be and you can see that you will run out of money, then you need to do layoffs to survive.

The decision you need to make is how much to cut and why. This is a complex and often nuanced decision. The short of it is  this:

Always do layoffs at once, never piece meal, and layoff more rather than less.

Make a decision based on runway and survival of the company. Make a decision based on new plan, not based on the plan you had before. This is probably the toughest thing you’d need to do as a founder, but there are times where you need to do it. Do it sooner rather than later, do it with respect, and cut more rather than less.

Now that we went over the ways you can conserve cash, lets talk about how you can get cash in.

8. Get customers faster

This may sound odd, because why wouldn’t you close customers faster anyway? The point is, think about friction points, anything that slows down your sale? Can you change your payment terms from 60 days to 30 days? Any other hacks? Try to get cash in the door faster.

9. Encourage annual payments and longer-term contracts

Think about offering a discount for an annual payment vs. monthly payments. During the tough times this could be particularly helpful. Extra cash is much needed and it is easier to get it out of existing customers by offering a discount, vs. getting new customers.

Along similar lines, offer a discount for longer contracts. If someone is willing to sign a 2-year contract thats a better deal for you and more certainty in your forecast.

10. Raise capital

It is not an accident that I put raising capital as the last item here. This is literally your last resort, meaning you should first do all the other things and then think about raising more capital. Why?

Because prospective investors do not want to fund the founders who only solve problems by raising more capital.

This is particularly true during tough times, and is one of the filters that investors will apply.

For example, if you present to investors and say, we are considering layoffs and it will depend on how much capital you give us — thats a really bad signal. What investors want to hear is — we’ve already done layoffs, we are super capital efficient, if you give us a bit more capital it will last us for very long time.

Remember investors do not want to invest if its clear that the company will run out of money again.

In general, everything is tougher during the slower times, and raising capital is even tougher. Investors take more time, the terms are less favorable, diligence drags on, terms sheets get pulled — everything gets wacky and slow.

The number one way you can raise successfully during the slower times is by being prepared. You should never fundraise unprepared or piece meal, but it is particularly costly to do so when the times are tough.

Have a fundraising plan in place. Align in very carefully with your overall plan. Start earlier because it will take longer. Target the right investors, don’t waste time. Engage your existing investors and advisors, and execute with precision.

To sum up — the best thing you can do is to review and revise your plans and make new plan, make the adjusts you need, conserve cash and be ready for longer fundraising if you will need to be raising capital in 2019.

Startup Advice

4 Comments Leave a comment

  1. Good advice. I’d add #11 which has saved companies I’ve managed in several down cycles.
    #11. Adjust market positioning to emphasize cost savings. When everyone is tightening the belt, show them how to conserve cash.
    Since A/R always stretches during down cycles, make sure you have relationships with vendors who turn A/R into cash with predictability and low friction.

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