How startup founders should react to the economic storm

Many founders are facing the first economic turbulence and are quickly overwhelmed with (well-intentioned) advice. While the call to “cut costs,” “close the hatches,” and “optimize for run rate rather than growth” certainly has merit, such advice is also far too general — let alone phase-dependent Startups, profitability, and financial runway – to be really useful. In my experience as a serial founder and former executive at fast-growing tech companies who have taken companies through various types of economic shocks, knowing how to apply these tips is often more valuable than the tips themselves. From CEO strategy to effective cost reduction – here are some of the lessons I’ve learned along the way.

A financial crisis is an opportunity to finally make the decision(s) you’ve been putting off.

Take a second look at the decisions you put off because you were too cautious in the good times to “rock the boat.” A downturn is often the best — and paradoxically, the safest — moment to be truly bold. The water is choppy anyway. Disruption is priced in. At one of the companies I ran, we had invested heavily in a particular business that just wasn’t taking off. But because of the sunk costs, we kept trying different ways to get it working, to the point where I was spending a disproportionate amount of time on it. When the crisis hit, she straightened things out immediately. I closed it and we have never looked back.

Don’t underestimate the time it takes to raise funds – especially during a crisis.

Founders, particularly first-time CEOs, often do not consider the lead time required to raise funds. Raising funds when investors are lining up to cash checks is a very different proposition than doing so during downturns, when due diligence tends to be heightened. Since you never want to raise funds if your runway disappears in front of your eyes, it’s best to assume that from the moment you make the decision to raise money, you’ll need (ideally) a revenue run rate of around 12 months . That includes (up to) nine months from initial contact to the completion of your round, plus a quarter to not look desperate.

If a “round down” (where you raise to a lower rating than the previous round) becomes inevitable, then lean into it.

Almost all founders tend to resist a down round at all costs for two main reasons: first, in an industry that values ​​rapid growth, there is a perception that a down round is the beginning of the end of a startup; Second, in the War for Talents, founders have likely had to offer new hires extremely generous compensation packages, often largely in the form of stock options, and as soon as news of an imminent round outage breaks out (which it invariably does), they will be confronted with employees demanding their packages be re-planned to negotiate if the company’s valuation falls. New investors will be similarly outraged. This can prompt founders to cut costs drastically to lower their burn rate and avoid a downward round. Of course, if you can find a workable way to avoid a down round, then you should. But if the choice is between a downward spiral and a death spiral, then you should (obviously) lean on the former. As Brad Feld, co-founder, VC and entrepreneur at Techstars put it, “I heard someone say, ‘Once you lose a lap, you’re dead!’ No! People gave you money, so you’re the opposite of dead. You have a chance to move on.” Or as one founder going through a downturn a few years ago told me, “I’m grateful we made it. We came out of it stronger at the other end.”

Communicate, communicate, communicate.

As a leader, if you are not transparent and do not communicate clearly and regularly, rumor and hearsay will soon take over and your words and decisions will be subject to the worst possible interpretation (“The company is going bust”, “We are all about to be fired” and so on). Fearing the worst is a very human trait. The more you communicate with your co-workers about what’s going on (without sharing too much) and stay ahead of the rumor mill, the more trust and goodwill you will gain.

Don’t make promises you can’t keep.

Under pressure from employees, for example in a public forum or AMA, less experienced founders sometimes promise things they cannot keep, such as that there will be no layoffs at the company. The reality is that you simply have no idea what to expect. According to today’s information, layoffs may not be necessary, but who knows what the situation will be like in three, let alone six months? It’s best to communicate with complete transparency about the current situation, the decisions you’re making, and why — and never hold hostages to fate.

If you must leave people, do so with compassion.

do it fast Make it transparent. Do it humanely – put yourself in their shoes. Never make bulk exits on a video call (it’s cruel, it will leak). Never do this by simply deactivating an employee’s work account or revoking their building access. When you have a large number of people to leave, email notification is sometimes the only viable option, but each person must then be followed up in a one-on-one interview with a senior executive, by video or phone, if necessary, within 24 to 12 hours 48 hours. If an employee has given your company a lot, they should at least be offered an interview where they have the opportunity to ask questions. Properly managed, this experience can be an extremely impactful event in their lives. After all, it’s best for team morale if you all leave at the same time, rather than doing so in stages each time things take a turn for the worse.

Don’t take the “mayonnaise” approach to cost cutting, where cuts are spread thinly and evenly across your organization.

When it comes to cost cutting, the tendency, especially when the leadership of a company is not acting as a single team and aligned with strategy, is to spread the cuts evenly across all areas of the business to achieve the required 5-20% cost savings. to achieve . This standard approach, which may seem like the “fairest” option, actually spreads the pain across the organization and risks damaging the very core business. It’s far better to strategically focus cuts where they will have the least impact and keep resources where they matter most. You should think of large projects, initiatives or products that you can cancel or postpone, as well as hiring freezes.

Leave no stone unturned when creating money.

To expand your cash reserves, in addition to cost cutting, you should explore all cash generation options including debt, asset sales, convertible loans from shareholders, and government support. I also strongly recommend that founders have early and direct discussions with their boards, particularly to determine each board member’s risk appetite and supportive capabilities. This has proven extremely helpful to me, especially when a company I ran was on the verge of being unable to pay salaries. Knowing which shareholders wouldn’t panic — and might be able to help out with a check — was invaluable at the time.

These are the tips that have worked for me over the years and while not all of them will agree with your own situation, some of them certainly will. No entrepreneur is successful alone. So find people whose judgment you trust — a mentor, an investor, a board member — and figure out what you should be doing in the context of your own business to navigate the uncertainty ahead.

Maëlle Gavet, CEO of Techstars, has held senior positions at numerous large technology companies around the world, including Ozone, Priceline Group (OpenTable, Kayak, and Compass. She was also a principal at the Boston Consulting Group for six years. She is the author of Trampled by Unicorns: Big Tech’s empathy problem and how to fix it.

Virginia C. Taylor