It’s been over a decade since the onset of the Great Recession and nearly twenty years since the famed dot-com crash in early 2001. The signs that we’re entering the third major slowdown of the Internet era are popping up in feeds daily:
- In April, former high-flier, venture-backed, and still newly public Robinhood announced layoffs of 9% of their staff
- On May 4th Cameo, a site that connects anyone to athletes and celebrities for the purposes of creating custom videos announced a layoff of 87 people (nearly ¼ of their staff)
- At the end of May, Bolt announced a layoff of 250 people, or ⅓ of its workforce
As if that weren’t enough, investors are also seeing the signs of slowdowns and responding accordingly. Legendary startup accelerator, YCombinator, recently dispatched advice to their portfolio founders to “plan for the worst” and Sequoia, who famously shared the RIP Good Times presentation at the onset of the 2008 recession added a new presentation outlining that this will NOT be a quick in and out recession.
If you’re a founder, take a breath. This too, shall pass.
There are basically two doors open to founders at this time: Get to default alive… or end up default dead. Default alive refers to becoming a sustainable enterprise that can extend runway with cash already on hand and/or become cash flow breakeven—now. Default dead can happen faster than Fast, which raised and burned $120 million without growing revenues or course-correcting quickly enough—and no longer exists. If you’re not familiar with the concepts of default alive and default dead, start by reading Paul Graham’s primer on the concepts.
So how do we get to default alive? I’d offer you’ve got 30 days, at most, to get tight on the following:
- Listen to your customers intently and make sure you’ve got something worth the pain that’s coming. Bessemer has great tips from the CEOs of Twilio, Shopify and Pinterest.
- If you haven’t started monetizing, you need to find a business model with sustainable unit economics. It doesn’t need to be a perfect model; don’t get lost in spreadsheets, as 80/20 will get you there. Do start making money, as revenue is the best source of financing that you can find near-term.
- If you’re already monetizing, think hard about how to grow recurring revenue. Is it lowering entry points to add users—which works if churn is low but can kill you faster if churn is high—or is it moving upmarket and/or solving more problems for higher-paying clients?
- Finally, and really first, adjust expenses for the current environment.
On expenses, get ready to feel the burn. For many founders, this is going to mean rationalizing staffing, adjusting hiring plans and revisiting investments (timing and amount) in new products, markets and channels. Sadly, this is likely to also involve downsizing as you need to extend runway and, if possible, achieve breakeven as quickly as possible. Don’t overthink it. Make decisions quickly knowing full well that some of them may prove wrong in hindsight. You’re fighting for survival and you owe it to your clients, your teams and your investors to do everything possible to get your company farther down the road to have a chance at success.
If you’ve been building a hyper-growth company this is going to feel very unnatural; but it’s both necessary and unavoidable. You don’t have to take my word for it—YC has similar advice to their founders with less than a year of runway. Now is the time to take it.
Some of you will find capital remains available, but it’s not the Wild West that it was last year or even a few months ago when diligence was nonexistent and terms were founder-friendly. Make sure you also explore alternative sources of financing including working capital financing and recurring revenue financing, such as Pipe, as funds may be more available and terms may not be as onerous. It’s going to be hard to raise now, YC is even advising portfolio companies to assume they won’t be able to raise over the next 6-12 months.
That leaves us back in the world of building businesses where cash flow, once again, is king. Fundraising returns to being a step towards building a company, not a focal point as it had become over the last few years where rounds led to more rounds and mega-rounds all within a span of months at ever dizzying valuations. I know the steps I’ve outlined above work because it’s very much the same process we employed at Junction Education beginning in 2018 when we raised our last round of funding. We managed layoffs, got to breakeven within a year and doubled down on expanding use cases to help our existing clients grow their businesses faster. You can manage the current environment AND deliver growth, Junction Education was recently cited as the 41st fastest-growing company in the Northeast, and we’re doing so profitably, with sustainable unit economics and with no price increases for existing clients.
Times of crisis can be useful opportunities to strengthen leadership skills and grow in both resilience and savviness.
You will get to default alive, gain control of your future and come out of this environment stronger. You are not alone. Positive cash flow buys you time, and right now time is all anyone wants. Let’s get to work.
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