A delightful guide; How not to panic during a (looming) market downturn - for startups (with resources)
“Panic helps me think clearly, and be more productive”– said nobody, ever.
TLDR;
As founders, this is your moment to rise to the challenge and prepare to be balanced, calm, and composed — and to not panic. Instead, the successful founder does not react; she is anchored in solid confidence, prepared through convergent critical research supported by divergent creative action, and guided by wise, supporting, conscientious (never fear-mongering) advisors, mentors and investors. You are not alone. The time of the lone wolf is over.
Therefore, no (looming) fight must be had, for the battle has already been won (within) through preparation; moving through a temporary downturn with grace and precision, adaptable and flexible, for any eventuality.
In the art of war, Sun Tzu teaches us to “rely not on the likelihood of the enemy’s not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made our position unassailable.”
Inflation, war, and The Fed have created challenging conditions for markets. Tech companies and startups in particular have, until now, been overvalued. As such, and in a turn of events, we are seeing valuations drop sharply by as much as 70-80% or more in some places. This has impacted public markets, and that sentiment has also made it through to private markets. This could make the fundraising prospects for startups challenging.
With mixed signals on whether a recovery is looming or not, it becomes critically important to shift attitude and mindset. In this delightful guide, you will discover practical ways to manage this downshift, supplemented with exceptional resources and links that you may have missed.
Proactively reach out to your investors
Just as in life, we should surround ourselves with people and groups that help elevate our path to recovery during difficult times. The same is true during a financial downturn, especially for founders of startups. And this is what we have done at Mamo.
Proactively connect with your existing and potential investors to understand their perspectives. Remember, it is essential to understand different perspectives, including those from VCs of various sizes and those that invest at various stages in a startup’s lifecycle. This will help you get a broad understanding of the situation.
In our case, we then produced a document that outlined Mamo's business and financial health, including key metrics specific to our business. This included creating base-case, best-case, and worst-case scenarios with accompanying plans for each. We then shared and communicated this with all our investors.
The research and output eventually helped us write this delightful guide, to help fellow founders, especially in MENA, learn and access the hundreds of resources we read and filtered through, the best of which we have provided at the end of this guide.
Cash is king
In the worst or base cases, it may be helpful to conserve cash, extend the runway, and shift from focusing on growth to focusing on efficiency. For example, slow and steady growth and reduced burn become more favorable than aggressive growth at high burn. Especially if your startup needs to raise new funding within the next two years; conserving cash should be of higher priority than growth.
Find creative and clever ways to reduce CAC (Customer Acquisition Cost). For example, leverage existing customers to find new ones and incentivize new ones to refer others, even if they don't need your product or service. It's time to hunker down and ride it out.
“We had often seen that the leaders in markets are often just the last ones standing 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.”
?? Change plans to prioritize cash, 39 Moves to Survive (& Thrive) in a Downturn: 2022 Edition
Turn product-user fit into product-market fit
Like a16z, we believe in finding product-user fit before finding product-market fit. To what extent have you built the right product for the right user? As such, focus and hone in, and during the downturn, these users will become your saving grace. Service them, nurture them, and honor them.
“Product-user fit is an essential step in the journey to product-market fit, in which nailing the product to win over the correct user is essential. The path from product-user fit to product-market fit is all about answering a few core questions: Who really wants this today? How many of those people are out in the wild? What else would it take in the product to turn non-users into users of our solution? What macro story must play out in the market to substantially shock market-wide demand?”
?? Product-User Fit Comes Before Product-Market Fit, Future from a16z
Financials
If you haven't already, it's time to understand and optimize your bookkeeping and ensure it's in good order. With your financial data, you understand the options at your disposal and help drive the right decisions. Understand your key financial metrics and make sure you have the basics to hand. Here are five key business metrics to get you started.
Cash on hand
First and foremost, know precisely how much cash you have in the bank and on hand immediately available on the last day of the reporting period.
Burn rate
Burn rate means the amount of capital your business is spending or "burning" to finance operations. Remember, it costs money to build a successful business. Salaries, software, marketing, and other expenses contribute to your burn rate. The problem arises when you're burning too much cash or burning it too quickly relative to your revenue. One way to let the fire settle down is to negotiate better credit terms with your vendors and partners. Look into deferred invoicing where possible.
Runway
Runway is how many months your cash will last you; the longer your runway, the more time you have to build and grow. Your cash and burn rate determine your runway. If your net monthly costs and expenses are greater than your net monthly revenue, well, you'll eventually run out of cash.
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Your runway tells you when "eventually" is. These financial metrics can also tell you a lot about your business. For instance, a shorter runway means you're spending too much money, or your revenue isn't growing at a sustainable rate. In either case, you have a few options to extend your runway:
Revenue
Revenue is the money you generate through sales of your service or product and is a crucial measure of business health and performance. However, remember that revenue is not an accurate measure of your company's financial health as it does not consider your cost of sales or expenses. While looking at your overall revenue is essential, you'll get more insights by breaking your revenue down by type (e.g., recurring vs. non-recurring) and source (products and plan levels), especially if you're a SaaS business with subscriptions tiered pricing. Build your revenue forecast and projections based on plan level. This data can help you make sound strategic decisions about pricing, marketing, sales, and overall growth.
Gross margin
Gross (profit) margins are the profits you make by selling every unit of your product or service, excluding the overheads (expenses) you need to pay to keep the lights on and pay your people. Higher gross margins are always a good thing. Not every startup aims to optimize margins immediately, though. In times like these, every incremental dollar counts though, so you should also start looking at ways to increase your margins. Negotiate more frugally with vendors, partners and suppliers.
Revenue growth
Revenue growth is another critical metric for establishing how successful your business is. It determines how much revenue has increased over the prior period (e.g., M/M). Having revenue growth is a solid signal that you are on a positive trajectory. You should continue to execute at a high level and identify opportunities where you can double down.
Engagement metrics?
Recession or no recession, the metrics discussed above will help you make sure you're measuring the core financials of the business and generally excellent practice. It will help you maintain accountability and measure growth. At Mamo, our dashboards help us forecast and plan cash flow, burn rate, runway, revenue, and revenue growth. We also measure market-specific engagement performance to maximize growth and fundraising. These include but are not limited to
At Mamo, using the metrics above, we have created and simulated multiple scenarios inside three sections outlined below:
We coupled these with actions we must take to prepare for (at least) the known unknowns. We recommend creating a financial model with multiple scenarios; we found the following guidelines helpful.
?? How to Do Scenario Analysis: Step-By-Step Guide, finmark
Carefully curated resources
We have collected all the resources our friends and VCs shared with us. We have also included Twitter accounts of people we think you should follow to stay updated. And only included the most delightful ones filtered by their resourcefulness and helpfulness, so you don't have to weed through them.
Reading
Video
Podcast
We've used Spotify, please feel free to search for these titles on your preferred platform
People on Twitter
List of people, in alphabetical order, to follow on Twitter with their profile links.
If you have any great resources or people that you follow, share them in the comments below so that everyone can benefit! ??
By your friends Imad Gharazeddine & Asim Janjua at Mamo.
Great read Imad. We have faced a similar scenario when COVID hit in 2020, its due to some of the steps you have highlighted over, we were able to survive, while many folded, through sheer resilience and flexibility. I am also curious, if there is a metric to create for channel/partnership/referral sales, to determine high performing channels and hone in on that. Just a thought