Playbook to Survive a Downturn

Playbook to Survive a Downturn

Playbook to Survive a Downturn.

An ongoing series where I share a “Business Playlist” of articles that made me think in the hope that you find them valuable also.

This week: The media is currently full of articles providing guidance on how to survive a downturn. Here are excerpts from an article I found to be more insightful than the generic dross out there. It is written for software industry leaders but contains nuggets of wisdom for all company leaders.

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39 Moves to Survive (& Thrive) in a Downturn: 2022 Edition

This article is by Pete Flint, a venture capitalist at NFX, and twice the founder of “unicorn” sized companies (valued at $1B+). He has operated companies through two downturns (2000 and 2008) and shares the practical lessons he has learned both as an operator and investor. 

I have curated a selection of highlights from the article I believe are relevant for all industries. Quotes from the article are in italics.

“We’re facing a confluent swirl of the following: inflation rates hitting a near 40-year high; rising interest rates, oil and gas prices skyrocketing; a pullback in public equities and the crypto markets; a snapback of tech growth as the pandemic recedes; increasing layoffs; and socioeconomic and political turmoil due to the current war in Ukraine. It’s not pretty out there.

I want to take an updated look now at what lies ahead for startups, and share an actionable list for how to find the opportunity in the storm. I’ve built this list pulling from my experience both as a former Founder and now as a VC.

Know this – crises always end. We have seen repeatedly how economic shocks drive efficiency and accelerate automation, which in turn drives tech adoption. They are a cyclical part of our market economy and there are black swans that inevitably occur. Many of the most successful technology companies (Airbnb, Uber, WhatsApp, etc) have started during periods of market uncertainty. You’ve probably heard this many times, and I know it’s small consolation for what is going to be really tough times for many.

But the point is this: The only way to build an iconic company is to do things differently. And in a crisis, survival requires being and thinking differently. There is an abundance of opportunity in this moment if you can see what others do not, act quickly, and keep your head up.

I’ve found there are three distinct but equally critical elements of how you manage a crisis

  1. The first is managing losses. 
  2. The second is gaining ground. 
  3. The third is managing psychology.

Change plans to prioritize cash
Think like an investor gauging downside risk in any particular investment. Assume things are going to be worse than you think. The market has shifted. Above all, your primary objective is to not run out of cash. We have seen many times that the leaders in markets are often just the last ones standing coming out of a recession when everyone else threw in the towel or went bankrupt as they were unable to raise additional capital. They had the grit and resilience to battle through and build an enduring company.

If you have to make layoffs, make them deep and early
If you have to do layoffs, the best way to handle it is with one deep cut as fast as possible. Nothing is more demoralizing than multiple rounds of layoffs. And retaining cash is key to prolonging survival. Always remember that a layoff upends someone’s life at the worst possible time. Be as human, kind, and generous as possible.

After the layoff, be sure to tell the remaining employees how painful it is to lay people off but that you believe this will be the only round of cuts – now the company is in a more stable and solid position to survive. The peace of mind you are giving them is crucial.

Refocus marketing on the highest ROI activities
This is traditionally one of the easiest places to trim back to retain cash. Reassess all your marketing channels and their cost-effectiveness. Task your internal team with identifying the lowest-cost / highest-ROI marketing opportunities and scaling those to the max. Dive deep into the data and recast your strategy. Longer-term projects and initiatives can be put on the back-burner.

Assess all software and infrastructure costs
Now is the time to tighten your belt. Start by cutting things no one uses then move on to cuts that are “nice-to-haves” but not critical.

Fire certain customers
There’s often a bias for quantity of revenue over quality of revenue. We disagree. Not all revenue is created equal – you want profitable revenue. Now is the time to tighten your funnel and focus on your top customer segments. You want to understand everything possible about them. You want to retain them above any others and find more of them. They are the ones who bring in profitable revenue and have demonstrated stickiness with your product or service. For customers that are not critical strategic partners and who are loss-making, determine if there are internal changes you can make to turn these relationships profitable. If not, approach them to renegotiate, and be ok to lose them.

Reorient channels and control your destiny
Focus on channels you can control. If you are selling through third parties, you may no longer be able to count on them to keep selling your product. They most likely will be distracted by other things. This will make it even more important to manage what you can control. If successful, this has the additional benefit of driving higher margins and is a great forcing function to reorient sales channels and sales motion towards direct sales.

Incentivize faster payments from your customers
Offer discounts on invoices to get cash in quickly. Cash in hand is worth taking a temporary hit to your gross margins. This is particularly true when cash is in short supply.

Renegotiate contracts and leases
It never hurts to ask for reductions or better payment terms. Keep in mind, however, that these companies also have to stay alive. They are probably having to lay off employees as well. We’re all in this together. Be fair and compassionate, but there is no shame in asking.

Gaining Ground
Contrary to what many would expect, a downturn is the best time to position your company for growth and long-term success. Your larger competitors will likely be knocked sideways and unable to react. Many of your smaller competitors will be short on cash, hibernating, or unable to match your moves. While you are managing losses, you must also be making moves to gain ground.

What to do when customer demand is spiking:
Classic economics would tell you to increase your price because you are also seeing increased demand. But the obvious backlash is that you could come across as gouging your customers and that is absolutely something you should not do. 

Instead, a better strategy would be to focus on gaining as much market share as you can, but at the same time, creating more premium lines of services. If you’re onboarding many more customers, chances are you can also sell more premium stuff to those existing customers. Focus on more of a “land and expand” strategy. 

What to do when you are losing demand:
For these companies, it could be super tempting to lower the price. You’re seeing demand fall down. Should they lower the price to gain back the demand? Lowering the price would be absolutely the wrong thing to do in most situations. If you drop your price, you’re training your customers to expect your service for less when things pick up again.

One tactic is to think of 3 non-pricing concessions before you even think about dropping prices. For example, can you give more product away and preserve the price? Can you be more flexible with payment terms? Can you work on a risk or reward basis? Can you bundle products and create a white-glove service? De-feature the products and create a low-entry offer that people can actually buy during these times so they still are in the system, but at a reduced value?

Essentially, keep the price and value alignment intact even during these tough times.

Consider acquisition
If you’re not strapped for cash, now could be a good time to consider small companies you can acquihire to bolster your talent. For a larger, cash-rich company, the prospect of immediately hiring a pre-existing high-quality team that has worked closely with each other in a similar area can be really compelling. It can accelerate the roadmap and bring on more entrepreneurial talent.

Turn fixed costs into variable costs
Are there 3rd party services that can provide a similar level of service as someone you might otherwise have hired as a FTE, but on a performance basis?
Independent contractors are a bargain compared to most agencies – and can be a bargain compared to FTEs for some roles.

Be committed to building a high-performance culture
In a downturn, everyone must perform. This becomes non-negotiable.

  1. Explain what you are doing and why you are doing it.
  2. Give everyone clear numerical goals specific to their function.
  3. Show how their goals impact the other functions.
  4. Be visible with metrics company-wide.
  5. Be fair. Re-forecast and revise targets to be realistic.

Quickly adapt your company culture to the current reality
During Covid, there were unprecedented stressors on us all. We’ve all been through a lot over the last 2 years, and now there’s war in Ukraine alongside this pending economic downturn. The key to great leadership is to react quickly to help everyone stay engaged and feel safe. Mental health, happiness, and connectivity are your #1 goal for your company culture.

Empathize with your employees
People tend to adopt more of a “what will happen to me?” mindset in times of fear and economic uncertainty. Even if you are stressed about managing the entire company, acknowledging their concerns is critical in helping them be productive. Be as transparent as possible and explain in detail how the company will be able to get through this particular crisis and what everyone can do to contribute to the new plan.

Build camaraderie
Get to know each other even better. It may seem counterintuitive when you feel like you’re running around with your hair on fire, but while there are so many big things going on, it’s even more important to take time out to focus on the little things. Ask people about themselves in meetings. Celebrate birthdays and work anniversaries.

Make space for creative collisions
Remote and distributed teams became standard during Covid. This came with several benefits – it enables efficient work and the ability to tap into a larger talent pool. However, remote teams are likely not optimal for the creative process. 

When there is significant uncertainty about the economy and direction of the company, getting people together is the right move. If you are struggling as a remote-first company in a downturn, try getting everyone together for a few days. Rent an Airbnb, rent an office. If your team is small, invite them to your house. You might be surprised by the productivity, but even more so by the much-needed creative problem-solving that comes out of being in person with your team for 8 hours.

Celebrate small victories
With all the uncertainty and stress, take time out to celebrate the team’s small wins on a weekly basis. Build a long-term vision, but focus on a near-term plan and things you can achieve quickly.

The compounding impact of many seemingly little wins can be astounding. Small wins have an outsized impact in tough times and give you a sense of progress and success when things around you are grim.”

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This would be a good time to sit down with your leadership team and conduct a scenario planning session. If you would like an external facilitator to take you through a proven process, please feel free to reach out.

You can’t predict the future. You can’t plan all the details. But you can instill your leadership team with the confidence of knowing what direction you need to move in, and the right actions to take when certain “trigger event” milestones are reached. You are not panicking. You are prepared to execute decisively if, or when, certain scenarios eventuate.

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Until next time…
Stephen

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