I've Got to Admit, It's Getting Better...

Tech markets appear to be improving. But are they really? Are they for you and your market specifically? I imagine many founders are thinking about how they should act to both take advantage of changing markets without making dumb, costly mistakes by jumping too soon.

At their core, founders are builders and tend to move aggressively towards growth. Their investors back them for this attribute. But great founders are also data driven and realists, and must adjust to the world as it is (not as they wish it were). Since early 2022, most tech founders have had to reprioritize growth for efficiency, to reduce expenses and extend runway, ideally without mortgaging their longer-term plans. This came with pain, disappointment, and wistful feelings of FOMO. So, the earliest signs of improvement can be met with zeal and overreaction. It’s vital founders and teams evaluate the green shoots of market improvement (customers or capital markets), and have a plan to go on offense before pulling the trigger.

Always remember that markets are volatile and change direction for a wide range of uncontrollable reasons, unpredictably. So, you never really know if an improving situation is real, durable, or fleeting. For those of us who were running companies in 2000 and 2008, they were vastly different downturns. In 2000, the cash-crunch winter lasted 3-4 years, whereas in 2008, it lasted less than a year (for many, it was just a quarter or two)…this is a huge difference.?

Task #1: Make the determination of “is this real” a first order question for your leadership team

How: always start outside-in by gauging demand: Is business really improving, are customers buying at faster rates, are pipeline conversion metrics strengthening, are my AEs attainment numbers getting stronger? Create a data war room with Sales, Sales Ops, Marketing and Finance to have open conversations on the available evidence that the market is getting better.

Task #2: Decide on a threshold level to conclude that the improvement case is proven. What would be the percent increase in the core metrics and how many months in a row should it be sustained? Agree on a decision process.. For example: Sales must make the case, and Finance must bless it. Or the team debates and the CEO breaks ties. You can also see if the team is willing to raise the forecast and present a higher bookings number to the board. Be wary of arguments to add to hiring without a topline adjustment. It’s easy to make the case that the benefit will be in the net fiscal year and it just won’t happen without investment in the current period.?

Task #3: Create a new forecast with the changes to topline, expenses, hiring and bottom line. Key here is your belief in what the waypoint and milestones should be - is it cash flow breakeven, or some ARR, growth rate and burn rate in the future that you hope will lead to the next financing? You’ll need to test these assumptions with your board, advisors and investors to see if it fits their view of reality for the next round investor (early, mid and late stage markets are improving at quite different rates at the moment). You’ll also need to defend your investments as directly driving growth in the new environment. Be clear on how and why.

Task #4: Test your model with cash forecast as the main dependent variable. You’ll want to keep more cash than you think at the low water marks given the uncertainty in the markets, and likely add to expenses in tranches vs. via bigger, bulk bets.

Task #5: If you have debt available, don’t draw it yet. Only consider drawing it once you have confidence in growth and some of your initial experiments are showing results. Remember, you do not want to live on your debt or have your debt balance exceed your cash balance; the goal should be that the debt gets you to a better milestone, with a surplus of cash over debt once you get there.

Task #6: See if you can move forward more efficiently than before the downturn. It’s often the case that great companies come out of corrections with a new level of effectiveness; that leaner teams actually get more done, with more rigor, than bigger ones. Don’t miss the opportunity to see if that can exist for you. You will be a better company for it!

In the end, only you and your team will be able to make these growth vs. risk determinations. These are hard calls with big stakes and consequences. Use all the people and resources around you to form your point of view, be maniacal on gathering and studying your operating data, and really listen deeply to your team. Judgment calls can be stressful and hard, but hey, so is most everything else in a startup. Good luck to you in what we all hope is an improvement trend that will continue.