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When Deborah Sweeney took over as owner and CEO of MyCorporation in 2009, she immediately found herself in choppy waters. The global economy was sputtering, young tech companies were failing left and right, and her new business was forced to find its own way after being sold by Intuit.

And to top it all off, Sweeney had mortgaged her house to buy the company.

She knew right away that if she were going to be able to make MyCorp survive these tough times, it was going to take some deft steering and real ingenuity.

“I didn’t exactly have a lot of working capital,” she wrote recently for Startup Nation. “I had to keep the business upright until business improved, and I didn’t want to bring on any outside investors, so really the only option was to bootstrap.”

Sweeney was ultimately able to help her business succeed in those difficult circumstances by reducing spend, cutting the size of her team, and de-emphasizing growth in favor of efficiency.

Although times aren’t as tough now as they were in early 2009, many founders and executives are finding themselves in a similar situation to Sweeney’s: Trying to keep their business healthy as funding becomes harder to come by and the general economic environment worsens.

Indeed, it seems like you can’t check Twitter or TechCrunch without hearing about how winter is coming to the tech industry. Funding is drying up, and founders and executives are forced to adjust their strategies to accommodate the new climate.

Bootstrapping

A New Season

The list of warning signs for the tech industry is long and detailed. VC funding is drying up. High-growth firms are experiencing significant turbulence. The tech IPO is coming down to earth.

But, while the warning signs are clear, their implications are not. Even as publications and experts pile evidence about the tech-industry slowdown, none of them have offered thoughts about what this means for tech companies.

As a result, founders and executives in the industry are left wondering: “What can I do to help my company make it through the lean times?”

In this article, we’ll answer this question by exploring the current climate for tech startups and how to make it to the other side.

Section 1

Spending in Lean Times

Section 2

Metrics for Good Growth

Section 3

Silver Linings

Running a Startup in a Tough Climate

Spending in Tight Times

Even in the best of times, starting and running a business is risky. But when times are lean, those risks are amplified. With limited funding, the safety net for startups becomes less reliable, and the road to profitability gets shorter and full of potholes. The option of using an infusion of funding to fuel your growth engine or cover up weaknesses is no longer a real option.

tightrope

As a result, it becomes increasingly important for startups to rein in spending and operate more conservatively until the climate warms. Hyper-growth, that period that separates the most successful startups from the rest, is an increasingly risky strategy in times of limited capital.

A common frame for this position is that startups need to shift from offense to defense. That is, they’re better off de-emphasizing growth in favor of tightening the purse strings and burning through capital more slowly.

Indeed, almost every resource you turn to about surviving a souring economy focuses on the same issue: spending.

How to Think About Spending in Lean Times

In a great recent article on Both Sides of the Table, VC Mark Suster provides a detailed look at how startup executives should think about cash burn in lean times.

“[The emerging belief that securing funding will take longer than it has in the past] has led VC & entrepreneur bloggers alike to similar conclusions: start raising capital early and be careful about having too high of a burn rate because that lessens the amount of runway you have until you need more cash,” he writes.

Startups built on the model of “use VC funds quickly to accelerate growth, and then go back for more,” are likely to find themselves reconsidering this philosophy ‒ especially as the “go back for more” becomes less and less certain.

Of course, this has its consequences. For startups that have a product but are not yet profitable, “spending” is really another way of saying “fueling growth.” If you’re spending cash to build out a sales team or expand marketing, you’re paying for growth (hopefully).

So the “spend more conservatively” advice is another way of telling lean-times startups to de-emphasize growth.

This is, of course, pretty broad advice. As Suster points out, the question isn’t should you decrease cash burn when capital is limited, it’s by how much. And, more importantly, what factors in your specific circumstances should you consider when thinking about cash burn. Not all companies are in the same position or stage of their existence, which means they have different cash-burn needs.

Mark-Suster

Mark Suster

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He poses a series of questions to ask yourself ‒ Who are your investors? How strong is your access to capital? What is your growth model? ‒ to help you think about cash burn and growth. The right cash burn for your company is dependent on a lot of variables, so there is no way to give a blanket answer that works for everybody.

The entire post is worth reading, but one of the most important points he talks about is your risk appetite.

In Suster’s estimation, your risk appetite is another way of thinking about your company’s mission and personality, and it’s especially pertinent during times when funding is shrinking. The amount you cut back growth is directly related to how much risk you’re willing to assume.

What is Your Tolerance for Risk?

When Suster talks about risk in his article, he separates companies into two broad categories: those who “go hard” and those who “cut to the bone.” These two extremes describe two different management philosophies, which become even more at odds during low-fund periods.

The common advice during lean times is to shift toward the “cut to the bone” end of the spectrum: cut spend, slash staff, and focus on running lean.

“Some companies may be able to become ‘cockroaches’ or ‘ramen profitable’ by cutting costs and staff substantially and getting to a burn rate that lasts 2 years,” Suster writes.

Like a turtle tucking into its shell to survive an attack, these startups choose to weather a storm rather than power through it. If winter is coming, in other words, it may be best just to hibernate.

But what does this actually look like? How can you decide which costs can be cut and which are essential to your company.

In the next section we’ll look at several strategies for balancing spending and growth during lean times, and which KPIs to pay attention to.

The Right Metrics for Lean Times

With the tech economy constricting, it is fairly easy to say: “Cut spending! Run lean!” But what does this mean? The best startups are always efficient and prudent spenders, so what is objectively different about how they behave during lean times?

In this section we will look at this question from several different angles.

The End of Sloppy Growth

The words “startup” and “growth” are inextricably linked. Startups are all about growth. But all growth is not equal, and this point is brought into stark relief during belt-tightening times.

As experts start to diagnose the causes of this recent tech downturn, they keep pointing to the same thing: a vicious cycle of big fundraising rounds and sky-high valuations. Since about 2010, a positive feedback loop has led investors to pump tech companies full of capital, inflating those companies’ valuations as they go.

A recent article from TechCrunch lays out the way this cycle has led to the current problem and, in many cases, sloppy startup growth in general.

“High-growth companies have attracted high valuations, which allowed them to raise capital, which was spent to generate still more growth and raise the valuation again,” Rory O’Driscoll, a partner at Scale Venture Partners and the author of the article, states.

This cycle incentivizes companies to spend on channels that prop up short-term growth but that may not be aligned with long-term health.

“Unprofitable sales channels, subsidies to acquire customers and expensive advertising campaigns are all signs that a company is focused on growth at all costs rather than growth at a profit,” writes O’Driscoll.

This is what causes sloppy growth, which is another way of saying “overspending to obtain fast growth.” When times are tough, startups must make sure their growth is efficient.

Aiming for Profitability, Not Hyper-Growth

The TechCrunch article makes this point clear, arguing that it’s especially pertinent as the funding climate sours: Tech companies, especially in SaaS, need to focus on strong unit economics instead of just “growth.”

Growth can be bought, but not always at sustainable prices. O’Driscoll shrewdly connects this common mistake to the recent decline in revenue multiples for SaaS companies.

Revenue-Multiples

SaaS Revenue Multiples (Source: TechCrunch)

The nosedive at the end of last year is directly related, O’Driscoll contends, to declining sales efficiency of many SaaS companies.

“Over time, public investors either explicitly or implicitly realized that customer economics and the quality of growth have declined and, consequently, reduced the premium paid for excess growth,” he writes.

In short, this means that VC and the public market have caught on to the fact that many SaaS companies are inefficiently (and almost artificially) fueling growth. As times get tighter, these companies will be further punished for this strategy.

This, of course, shows up in the metrics they track. During lean times, capital-strapped startups subtly shift (and, at times, not-so-subtly) the metrics they emphasize.

Metrics for Lean Times

They start by de-emphasizing some of the “growth at any cost metrics” like:

  • Headcount growth
  • New bookings
  • Leadgen growth

The success of startups is often measured in tangible growth. How many more employees do you have than last quarter? How much have you increased month-over-month bookings? How many more leads are you creating each week?

These are important indicators that your growth engine is ramping, but they are exactly the type of KPIs that emphasize short-term growth over long-term profitability. Bookings and leadgen growth may look good to the outside world, but if they’re propped up by heavy spending (which they typically are) they could do more to hurt than help a startup that is trying to survive a downturn.

Instead, startups aiming for more efficient (albeit less extreme) growth focus on these metrics:

  • CAC
  • Payback period
  • Revenue churn

Clearly, these metrics are much more tethered to profitability. When funding is tight, the best startups work to make sure their growth is scalable, not just linear to spend. Paying less for customers (CAC) that return your investment in them quickly (Payback period) and stay customers for a long time (churn rate) is the surest path to efficient, stable growth.

But, aside from optimizing these metrics, what can startups do strategically to make their growth more efficient?

Cleaning up Your Growth

As you might expect, there is no silver bullet. Operating a lean, efficient startup requires diligence, patience, and dedication at every level of the organization. There are no quick fixes.

But there are a few principles that you can apply to help you steer your ship through choppy waters like these.

A recent article from LeanStack spells out a few of the best.

Put Time on Your Side

One particularly important aspect is the role of time. Most people see lean times as a matter of money. Funding is scarcer, so cash burn must be minimized. But this is only part of the equation. The implicit ending to that sentence is “so cash burn must be minimized until cash is available again.” That means that it’s not simply about tightening the purse strings, but also about optimizing time.

Ash Maurya, the author of the post and the book “Running Lean,” uses this philosophy to adjust how people think about bootstrapping. It’s not just “building a company without external funding” as it’s commonly defined, but about “right action, right time.”

In other words, when time gets tight, it becomes more important than ever to make sure you’re taking the right actions as the right time. Opportunity cost is just as critical to control as other costs. Are you spending this difficult period focusing on what matters ‒ adding customers, tightening your sales process, improving your product ‒ or simply putting a moratorium on extraneous spending? Having a real answer to this question ‒ and strategy around it ‒ are essential for making it through lean times intact.

Embrace Constraints

Lean times impose new constraints. Your marketing budget is gutted, perhaps, or your sales team slashed. These decisions will certainly slow your growth, but they could also help you build a more durable business.

If you’re going to make it through lean times, you’re going to need to identify the “mission critical” parts of your business, and focus on them (often at the expense of others). These constraints ‒ which are typically around the growth engine of your business ‒ will help you focus on the more central aspects of your business: product-market fit, ingenuity and the right team.

This subtle shift ‒ from constraint to focus ‒ is often what separates the best companies from the rest, especially during tight times.

Lean-Time Silver Linings

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Those of us with parents or grandparents who lived through the Great Depression know that the impact of that event didn’t simply evaporate when the economy recovered. Instead, the lessons of lean times seemed to stay with those who lived through the Depression, and continue to shape their behavior and outlook for decades. No food is wasted, no savings squandered on luxuries.

Research shows a similar trend with executives who shepherd their companies through lean times. A recent article from The Economist summarizes the findings like this: “Research also suggests that recessions have lasting effects on how executives manage businesses. John Graham of Duke University and Krishnamoorthy Narasimhan of PIMCO, a bond manager, have found that chief executives who lived through the Depression tended to run companies with lower debt levels.”

Executives who are forced to lead a company through tough economic circumstances tend to come out on the other side more resilient, durable and prudent.

Use Lean Times to Re-Tune Your Go-to-Market Strategy

All of the examples and principles discussed above (which, I know, is a lot) leads to a fairly straightforward conclusion: In lean times, the best startups are the ones that use it as an opportunity to recalibrate their business-side operations.

In general, this means scaling back on the types of things that lead to rapid (but not always sustainable) growth and focusing time on strategizing about how to make your business more profitable, efficient and scalable.

Accelerating profitability, in other words, instead of accelerating rapid growth.

Another recent article from TechCrunch summarized why this might not only be necessary for startups in lean times, but beneficial. Companies that adapt quickly, shifting their strategy to produce a profitable business, not just one that rapidly expands with hot air, will be better off in the long run.

“That silver lining is a ‘flight to quality’ that typically occurs during periods of multiple compression and financing downturns,” the article states.

And in the end, you might not only have scraped through tough times, but actually have come out stronger because of them.

Or, as Deborah Sweeney, the MyCorp CEO puts it: “Those lean times will be rough, but make it through, and you’ll feel unstoppable.”

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Insight Squared
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