For the past few weeks, I’ve been talking to 2-4 close investor friends/mentors per day. Often, it’s just to go out for a walk, or we talk about a company or two we are both investors in, or we trade notes on household management tips, or inside information we are hearing about the latest science or what’s happening to NYC, where we all have so many friends, founders, and people we love. With a few of them, I have also been trying to learn from them, to tap their wisdom of previous cycles, the 2008 global financial crisis, and the dot-com boom and bust.
For this post specifically, I wanted to share what I’ve learned from friends and mentors like Bilal Zuberi (the first VC friend I ever had, back in Cambridge, when he was at General Catalyst, now at Lux Capital), Ed Sim (20 years as a VC, perhaps one of the most on-fire enterprise seed investors out there now with Boldstart — link to our discussion on this topic is right here), Ravi Mhatre (20+ years as a VC and a co-founder of Lightspeed, where I’m a Venture Partner), and others. Below is a brief summary of what I’ve learned from these folks, and others friends, in the past few days, and my hope is to pass this along to other founders and co-investors so we all prepare for what is surely going to be trying and austere times. [Of course, as I’ve been doing with each post, I am reminding readers that I know challenges facing startups and investors is not anywhere near the level of pain that NYC and other cities will experience in April and May. That said, this is the real work going on inside companies and among investor bases, and so I am sharing this in the hope that it helps someone else out there trying to figure out the future for themselves and their company.]
Cutting Burn, Extending Runway – This seems obvious given the massive recession we are barreling into. The debate ultimately rests with “how much” cutting to do. The guidance from those with many years of experience has been to make deeper cuts that what may seem comfortable today. That is some hard stuff. The biggest costs for startups are usually salaries (ie headcount), but also real-estate — I suspect many leases will be renegotiated and/or smaller teams opting to go remote for a while or perhaps forever. This is the cost side — but what about the revenue side? For startups that were counting on revenues to come in to offset expenses, there will be at least 1-2 quarters, if not more, of big holes, misses, and maybe even doughnuts. Realistic leaders here will proactively reforecast what they can expect to earn as some business naturally churns during this period. All of this is immensely harder at scale, when a startup is growing fast, burning cash.
Business Model Anti-Fragility – I hope it’s obvious, but this post is geared toward enterprise/B2B startups; I cannot begin to imagine what most consumer startups are going through right now. Here, getting to some predictable cash flow is paramount. For each kind of business model and customer, it could be smart for founders to create pricing incentives to coax the customer into a longer payment cycle. For example, a business which charges customers annually may want to experiment with deeper discounts for multiyear contracts; a startup that charges monthly may want to do the same with annual contracts; and so forth — there are multiple ways to help secure the net present value of longer-term contracts. On the flip side of the balance sheet, a startup executive team should expect some natural churn as a result of the pandemic and demand shock, so basic human touches like picking up the phone, or proactively instituting grace periods and/or free months of service are moves which may pay off over time and stem churn. Similarly for B2B marketplaces, liquidity is king, so network operators who can stomach lowering rake to keep product flowing may be rewarded in the long run.
Go-To-Market In A Bad Market – No one would’ve thought when 2020 started that we would be here today on the verge of Q2 and questioning whether we will ever have live events, user gatherings, developer conferences, big dinners, and other marketing events in person again. Of course, I think we will — but when, and how, I do not know. No one knows. As such, founders are now scrambling to see if they can market their products and services via video demos, or through a self-serve offering, or through channel partnerships, or through developer networks, or through open source or open core models.
New Values On The Other Side – It’s hard to imagine, especially as we enter the peak month across various cities in our country, that we will come out the other side, maybe next year, maybe longer, where business optimism returns. What does that new world look like, and what will be valued in that new world? There are things that are valued today — metrics like Time To Value, Engagement, Net Expansion, High Margins, etc. — that will likely be valued higher in this new world. We saw glimpses of this pre-pandemic, with public markets valuing pure software with network effects like Slack and Zoom more than moving atoms around the world. Those differences may be held in starker contrast in the new world that’s yet to form. In that new world, headless software, bits over atoms, highly efficient and quick-value business models may separate themselves from “tech” broadly — that, in and of itself, maybe the one big change to startup parlance that marks the shift from one era to the next.