Learning from past recessions: How early-stage B2B leaders can adapt

This post was written based on learnings from the first installment of Pear VC's online speaker series, 'Surviving the Downturn Economy', hosted with the following CEOs and investors: Bob Tinker (CEO of MobileIron from founding to IPO, 2007-2016), Heidi Roizen (Partner, Threshold Ventures, investor during both 2007 and 2001 crises and CEO of T/Maker during recessions in 1982 and 1990), Mahesh Ram (CEO of Solvvy, formerly CEO and EVP of GlobalEnglish from 2000-2014), and Mar Hershenson (Managing Partner, Pear VC). Thanks to Andy Byrne (CEO of Clari) also, drawing on this article. I will write a separate post summarizing recession-era early-stage fundraising advice. Thank you to these individuals for sharing their experiences.

TLDR

• Your job is to survive, not thrive. You need to have >12 months of cash left. Remember to factor in revised revenue projections. If you can't last >12 months, cut expenses until you can. Cut early, and try to cut once only.
• Revise revenue projections. Give yourself a clear understanding of how revenue growth will change, which customer accounts to prioritize, and how to set goals for your team in an uncertain, downturning environment.
• Protect your existing base, talk to your customers, adapt and innovate your product & sale to meet customers' changing realities.
• Leaders and great companies are made in times of crisis. Take care of yourself, empower your teams, and have hope.

Cutting expenses

The companies who survive are the ones who adapt quickly. You need to have >12 months of cash left. If you can't do that, cut expenses until you do. Cut early, and cut once only.

"Revenue falls faster than expenses" means you can go from 18 months of runway to <9months left in 30 days. Look at your hiring and spending plans. Keep only what is absolutely necessary. You likely have some "nice-to-have" or growth-oriented plans. Be bearish.

Think about your costs in fixed vs. variable buckets as you determine where to keep and where to cut. Fixed costs include R&D (Eng, Product, Design), SG&A ( Executives, Customer Support) and usually influence Existing ARR (renewals) and Expansion ARR (upsells). Variable costs include Sales & Marketing and usually drive New ARR (net-new logos).

Cut early, and aim to cut once only. We all want to cling on. Humans have a hard time understanding logarithmic progressions, and hurting those we care about. But the companies who survive are the ones who adapt quickly.

Revising revenue projections

Modeling scenarios is hard. Be conservative in your revenue re-forecasts.

Group customers into risk categories - red, yellow, green. Evaluate churn likelihood by category. Use this to inform revised projections as well as prioritize your sales and account executive efforts and messages.

• Red/high churn: E.g., SMBs, customers in the travel industry
• Yellow: e.g., contracts coming up for renewal in coming few months
• Green: e.g., contracts not up for renewal in next 6 months

Go through every account and prospect. Revise projections and game plan for each account (see section below on innovating on product and sales game plan during times of change). This may include prioritizing or de-prioritizing the account. Do this repeatedly as the recession evolves.

Think about 2nd-order effects. For some companies, business will increase during this recession (telemedicine, work-from-home, delivery, at-home entertainment); while for others, business will decrease (restaurants, live entertainment). In a recession, which of your customers will have to cut headcount, and which won't? In the recruiting space, how will candidates' job-seeking behavior change in the next 6-12 months? 12-24 months? If you sell into industries such as hospitality, leisure, real estate, and construction, how will the slowdown affect your customers and their customers? How can you help them manage expenses, employees, and revenue through the recession and set up for the eventual recovery?

If you don't have financial modeling capacity in-house, there are now on-demand services where you can get a Goldman Sachs analyst for 10 hours to model for you. (If you have trouble finding help, email me at [email protected])

How should you set revenue goals (as distinct from projections) in an uncertain environment? If you're a 10-person company running on seed money, try to get early customers, build your product, and wait this out. If you're a run-rate business (e.g., 50-60 people, $10M ARR) and have enough cash for ~1 year, think ahead to where you need to be at the next fundraise and work backwards. Given this climate, what's the story in 18 months? Focus on modest revenue growth: protecting your existing base, winning customers, and optimizing a repeatable, really sticky GTM model even if the scale is small. That will be enough success criteria to raise money in this climate, you don't need 150% YoY growth.

If you can get to breakeven, you control your destiny.

Protect your existing base and adapt your product & sale to meet customers' changing realities

First and foremost, protect your existing base. Minimize churn as best as you can. Observe how your customers are behaving differently and ask your team to flag changes as soon as the smallest signals become available.

Second, go talk to your customers. How are they thinking about the recession? How are they responding? How haas their world and their customers' lives changed?

Third, talk to your prospects. And adapt your talk track. This is key. In business-as-usual, GTM teams have a playbook for finding and winning customers; this often becomes subconscious. When the market turns, customer buying decisions change; what drives urgency will change. Your value proposition must adapt. Things that worked before won't work anymore - and there are some things that didn't work before, that might work now.

Customers keep partners around in crisis but cut vendors. Adapt to meet your customers' changing realities: this could mean a different buyer (often the CFO or Head of Procurement in tight economic times), a different need, a different sales tactic. Seek win-win opportunities to get you and your customers through this challenge.

Mahesh shared an example from the 2008 crisis. At GlobalEnglish, he risked losing a large customer. He flew to Switzerland and Belgium to save the deal. His POC, an HR leader, was no longer the buyer. He was meeting with the Head of Procurement, who said, "We're in crisis mode, we don't need an HR and Talent solution." Mahesh's team spun up a survey for the entire Procurement organization to find out what they were spending on local vendors, finding out they were spending 20x what GlobalEnglish cost across 200+ vendors. With this discovery, Mahesh proposed a new pricing deal to the Head of Procurement: we'll change our licensing model to enterprise, allowing anybody in your company to use us; in return, you must cut total vendor spend by 50% - and that'll save you more money than we'll cost you for 10 years. That also enabled the Head of Procurement to deliver a huge cost-saving to the organization and take advantage of a unique, crisis-induced ability to mandate rapid change across local vendor managers. An incredible example of re-writing the go-to-market pitch, product pricing, and creating a win-win.

Heidi shared another example of win-win via GTM innovation. If you find yourself resource-strapped yet needing cash, consider selling customers a lighter version of your product. For one company, this meant offering a customer a country-wide license at a cheaper per-seat price, but without the training and service support. The customer had the resources to rollout the product and train their own employees, thereby saving the company staff time and providing revenue growth in a tough time, while giving the customer an incredible deal.

Keep an eagle eye on collections. Revenue bookings is one thing, collecting cash is another.

Stay close to your prospects and pipeline - that is your earliest warnings or indicators of how the downturn will affect your business. You can't wait until you completely blow a quarter.

Leaders and great companies are made in times of crisis. Take care of yourself, empower your teams, and have hope.

First, take care of yourself. This includes your physical, mental, and emotional health. This is going to last more than weeks. You need to be in shape to manage through all this.

Over-communicate: to employees, customers, and investors. Consider weekly updates to share what is being done and what is to come. At the very list, consider how your investors will respond differently to your request for help, if the time comes, if they have heard from you along the way, rather than if they have experienced radio silence the last nine months.

Consider strategy-focused vs. fear-focused language. Strategy-focused CEOs are 9x more likely to shift product or service offerings, 6x more likely to use words like "action", "opportunity" and 4x more likely to make changes to how teams function. (In contrast, fear-based CEOs used negative future words 13x more, such as "struggle," "difficult," and "hard", used the term "COVID" 9x more, and consume 5x more media).

Be clear about what's changing going forward. A powerful exercise is to put up "Before" vs. "After" sets of goals next to each other for your teams. What were our goals before? One of our goals now? This is one of the most important things your team can hear, so they know what to do the same or differently, more or less of.

Empower your teams. Don't lock yourself in a room and feel pressure to figure everything out. Get your team involved - ask them, what should we be doing differently? Develop that "Before" vs. "After" plan together. Mahesh shared a phenomenon happening right now, in the company's #ideas Slack channel - teammates are posting, "Customers are saying and asking for X", others are able to post solutions in real-time, and leaders can look back upon this feedback in the coming weeks and months as we continue to adapt.

Have hope. For companies who adapt and capitalize, downturns are when great companies get built. In Bob's words: "at MobileIron, we put our heads down, kept burn low, and focused on winning products and customers. It was a dark, scary 18 months. But when the markets turned back up, there weren't a bunch of competitors behind us. We were ready to capitalize and grow, and it was spectacular."

I hope this post is helpful to founders and leaders adapting their businesses. Feel free to reach out to me at [email protected] for help or clarification. Thank you to Bob, Heidi, Mahesh, and Mar for their input. Interpretation of advice my own.