A Warm Blanket for a Cold (Funding) Winter

In the startup ecosystem, we've been hearing about the funding winter for a few months now. The pain is particularly acute for companies that raised capital, in some cases substantial amounts, in the last 2-3 years. They have ramped up growth, team size and cash burn, and now are faced with the reality of no new funding for the foreseeable future with a fast depleting cash balance.

In our group, we make a healthy profit in one of our operating businesses and in one we should be breakeven soon but isn't profitable yet. Additionally, having seen many profitable and unprofitable companies as an investor in startups, some of these experiences and observations may offer founders a much needed warm blanket to help tide through a tough winter.

Mission-mode in cutting operational costs:

This is understandably a dramatic shift in strategy. You may not feel confident to start, but you need to start to feel confident. Focus on growing the islands of profitability in the business and be ruthless with cutting out the islands of losses/negative unit economics. Put an immediate end to all projects that were created out of passion, ego or to be in the news. There will be investors, gunning for an all or nothing outcome, who will still be pushing for growth even while the fuel is low. But founders must first survive and then aim to thrive. There is no shame in cutting down your scale, becoming profitable and then growing from there. Keeping one's head in the game is most important. Tech is a dynamic world and you never know when the sun will shine on you. For now, we need to survive.

Get out of bad contracts and deals quickly. It's sunk cost. They may have made sense at a different point in time and in a different context, but it is critical to get them behind you and not let them be a drag on the company every month. Otherwise the good work the team is doing everyday to get the company to profitability gets diluted by these ongoing onerous costs which nobody is responsible for. This really hurts the team's motivation.

Talk to your vendors and try and negotiate a middle path. If you have been a good partner to them, it may surprise you how vendors and partners step up to help in times of need and are willing to structure deals that are materially better than before. They value the relationship and also selfishly, would want you to survive and thrive as a customer.

Swiftly cut whatever operational costs you can, so that those costs stop compounding from today itself. Cash runway contracts and expands in geometric proportion with how slow or fast you cut the burn.

Aligning the Team:

When there is a dramatic shift in the strategy of a company, say from blitzscaling to pursuing profitability, identifying the team that is aligned with you and is staying on is very important. Without them you can't do anything as a founder. It is equally critical to celebrate the smallest wins and in the journey towards self sustenance. The team needs to believe they can cross the ocean by first crossing the lakes.

As an absolute last resort, if you need to let go of team members, do it compassionately and do it in one go. Communicate clearly to the ones departing and those staying about why you had to do it and why you won't need to do it again. Very importantly, be generous to those who are going to be leaving. 45% of new joinees at Snapdeal over the last few years have been from team members we had once had to let go or had left us. They came back because despite us being in a tricky situation, we treated them respectfully and generously when they left. They remembered and returned when there was again an opportunity at the company. It also reassured others inside and outside the company that even in tough times this company will do its best for them.

Taking Board and Investors along:

Board members and investors are important stakeholders and allies in a founder's journey. It is the founder's responsibility to align board members and key investors to what you want to do. If you are convinced that the best path for the company is profitability then tell them that in clear terms. They may quiz and push you to ensure you have thought through all angles and that this is not a panic-induced reaction that could be reversed after three months. In the end, seasoned board members and investors will respect you for taking hard calls at the right time for well-considered reasons. Also, good board members rarely bring up the past as a way to show founders down. They understand that the founder is under tremendous pressure already and the best that they can do is to ensure there is rigour in the decision making and then support the founders in their pursuit.

Dealing with external environment:

Drown out all the external noise. Often loud competitors have more problems than you can imagine. Sometimes their noise is to obfuscate their own issues. Don't get distracted or swayed by them. Play your own game. Eventually everyone needs to get to a point of self-sustenance. You already have a head-start now.

A thick skin is much needed to deal with the many "I told you so" fingers that will start pointing in your direction. Don't let it bother you. People will never appreciate the entire context of why you made some decisions. Just focus all the energy on doing what needs to be done now and those fingers will find other places to point to. The company's profit will be your only true friend that gives you mental peace.

Funding in tough times:

In these times, assume no new funding is coming into the company and take all your decisions based on that. As founders, we are always irrationally optimistic - this isn't the time for it, especially if the meter is running fast on the cash burn.

Fundraises may have given you pleasure, but building a profitable business will give you happiness. Enduring value gets created when you don't need other people's money. Investors also start loving you again because you can keep growing the business after achieving breakeven without diluting any more of their (or your) equity. And it is only when you don't need other people's money, that people slowly start lining up to give you money. There is always someone interested in owning a profitable company's equity at a decent price. For loss making companies, if the tide turns, there can be zero interest in the company's equity at any price in private markets.

During these times, it is also important to stay miles away from debt. Loss making companies that are running out of money taking debt is like drinking acid to cure a poisoning. It will only make things worse. Better to cut costs as quickly as one can and extend the runway.

Finally, keep the faith:

Not all storms cause only destruction. Some end up clearing our way as well. Likely this funding winter will create a much larger cohort of companies in the startup ecosystem for whom there is absolute clarity, out of their own pain or through vicarious experiences, that profitability is the primary and paramount objective, albeit at more reasonable growth rates.?

For now, the key is to muster the courage to continue when one is in the middle of the storm. On the other side of this winter unbelievable strength awaits you from having navigated through the stormy winter.?

Stay warm, focused and undeterred. Good luck!

(Originally published in The Economic Times on 14th Nov, 2022)