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Survival Is The New Norm
as we enter an economic cooling period
In 2005, I founded my second startup called AnchorFree and, like most of the world, we were devastated by the global financial crisis in 2008. Surviving the economic downturn meant we had to pivot quickly. It took several failed attempts to raise before receiving a lifeline from our existing investors though it came at a valuation 4x lower than our initial Seed round. As many know, a down round is extremely painful and something that, as a founder, you want to avoid at all costs. However, it is a test that can push founders to their limits and to return to fundamentals, which forges success. While the outlook was grim, we focused on surviving and building a sound and salient business and managed to emerge from the situation a profitable success just one year later.
Although today many funds have raised capital and the economy is not in the same condition as it was in ‘08, it’s important to prepare for the worst, particularly as high-interest rates and scared markets can persist and further sour the economy. Investors will continue to invest, but they will take longer to conduct proper due diligence and get to know founders better. They will also expect faster growth and/or a crystal clear pathway to profitability. As the economy has begun to take a turn, I’ve noticed that founders are looking for advice from their peers who have survived similar struggles so I wanted to share my learnings. Here are my thoughts on preparing for an economic cooling:
Review your budget and see what expenses you can cut to increase your runway. If you have people or operations functions that are “nice to haves” but not necessary, don’t wait to cut them because every day that you are not saving, you are decreasing your runway and your chances of survival.
Review your marketing spend and make sure that each dollar spent yields a return. Like one of our investors told us: “when you invest $1 you need to get at least $1.01 back.”
Freeze your hiring and replace people with others who can provide a multi-functional/larger impact, but don't forget that it takes at least 3 months for a new person to get up to speed.
Find a way to get to profitability. This is the best way not only to extend the runway and survive but also to raise money. As Paul Graham said, “be a cockroach because they are hard to kill”.
Can you find additional revenue streams? What will it take to do that? If you are consumer-focused, maybe there is a way to sell to SMBs. If you are a B2B business, explore additional distribution partnerships. It's an opportunity for all parties to increase revenues.
If you are fundraising, try to raise enough to extend your runway to 24 months even if you will take on extra dilution. Smaller ownership of a company with money in the bank and a chance at survival is worth more than larger ownership of one with an expiration date. Cash is king.
Create contingency plans. If you can create 2 or 3 different scenarios on how you can turn around your business, do the exercise.
You can’t control the economy or predict the way it will go but you can focus on your customers to guide you to build the best product. Build something that solves a real problem for your customers and use your team to make your customers happy. The companies that will prevail are the ones that can retain their customers and keep them happy.
Identify your best employees and issue additional shares so you can retain them and have them help you through this time of uncertainty. Your talent is your most valuable asset.
During a cooling period, these are certainly not the only options you have as a founder, but I hope this can spark some ideas that help you endure. Though I don’t believe we are headed for another recession, we no longer live in a period where founders can ask for a $40M valuation on a brand alone without a product or customers. The strong, resilient, and driven founders will survive.