Three ways startups can survive swift economic downturns — Act Fast!
Let week, the students at Duke’s Fuqua School of Business had the opportunity to learn from Troy Henikoff, Managing Director at MATH Venture Partners about how startups can survive apocalyptic events, like the COVID-19 crisis. Troy’s experience with leading a startup through a swift economic downturn comes from both leading his own startup, SurePayroll.com, through the dotcom bubble in early 2001 and the events of 9/11 later that year, as well as working with MATH Venture Partners and Techstars Chicago portfolio companies. Below, I’ve summarized the key points from our conversation, which were too good not to share:
When leading a startup, you have three levers you can pull to create cash:
1) Raise more money
2) Generate more revenue
3) Cut costs
Raising More Money
During rapid shifts in economic uncertainty, investors typically tighten their purse strings making funding raising more difficult. Most venture capital investors I’ve spoken with in the past couple weeks have mentioned they are not looking to make new investments in the coming months, but will be holding their cash reserves in case they need to offer bridge funding for their current portfolio companies. Additionally, angel investors have experienced a 30% decrease in their financial portfolios and are likely feeling the pinch. Given this, raising money in the middle of a crisis is unlikely to be your best option.
Generate More Revenue
This option will depend on your business and whether the characteristics of the COVID crisis help or hurt demand for your offering. Early stage companies in telehealth and direct-to-customer product delivery are experiencing large uptake in demand given the current social distancing restrictions. However, startups that rely on in-home service provision or target the travel industry have stalling demand. For startups like the later, their options are to (a) “mothball” the business and reserve their cash until society goes back to “normal” or (b) find creative ways to apply their assets to address current needs or constraints. For example, monetizing your back-end logistics platform to provide services to a new industry that is not currently shut down by social distancing practices. For some startups, generating more revenue will be an option, while for others, they will need to make the hard decision whether to pause operations or press forward.
For startups pressing on, cutting costs may be the only path for survival. Cost cuts should come quickly in order to maximize the cash reserves you have on hand; delaying simply reduces the cash runway you have once you are forced to do the inevitable late. While layoffs or pay cuts are never easy, startup leaders that demonstrate integrity and offer their staff dignity through the process may find that their employees are grateful and rally behind them and the venture. In fact, many CEOs are leading by taking the largest pay cut, while implementing smaller pay cuts through the rest of the organization. Regardless of the approach, the need for swift execution is imperative to preserve your cash runway and the survival of the venture through the crisis.
Leading a startup venture is hard in the best of times, but surviving times of crisis is when real leaders shine. The above offers insights into how to think about ensuring your startup lives to see another day.