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Tough Times, Tougher Startups

Tough Times, Tougher Startups

A nimble startup should have the capability to readjust to new realities

In a slowdown, it is ok to grow less or even settle at a lower level

Now is not the time to push for 100% growth rates at the negative unit economics

Building a startup is a demanding endeavour in the best of times. Startups encounter a range of challenges – a search for the right product-market fit, access to capital, technology choices, the task of building a winning team etc.

Many startups are able to think through these, make informed choices and execute their strategy to surmount these challenges and go on to become larger, enduring enterprises. Entrepreneurs are able to do this because typically they have good instinct and insight into how to resolve challenges relating to their businesses.

While the disruption caused by Covid-19 pandemic is unprecedented and will likely have serious economic consequences, startups in India have also been experiencing headwinds in terms of a slowdown in India’s economy over the last 2-3 quarters.

Many younger entrepreneurs, investors and other stakeholders have been reaching out to me over the last few weeks to share notes and brainstorm on what they should do in this period of uncertainty. The disruption due to Covid-19 has only multiplied their worries.

This is the time to be, as they say, a Wartime CEO. As someone who has gone through a fair share of ups and downs, here are some of my thoughts for start-up entrepreneurs on how they can weather this unprecedented storm.

Cut Burn And Conserve Cash

A nimble startup should have the capability to readjust to new realities and cut burn without losing its footing. A slowdown is a good opportunity to systematically peel the layers of the onion, examine each cost and identify the hidden costs, which while adding to the burn, are no longer creating value. This is the time to prune extraneous costs that seem like a nice to do or an investment way out into the future.

Cutting jobs should be the last option. There are often many other things companies can do to reduce costs without doing layoffs. Finding creative ways of reducing costs that don’t entail bringing pain upon our team members is the need of the hour.

Such cost optimisation is also helped by new options which keep opening up over time. For instance, SaaS solutions provide an easy and cost-effective option for large and expensive tech development projects. Similarly, a range of well-priced, domestic CRM solutions offers a capability that is comparable to leading global brands and at a fraction of the cost.

Because such transitions often necessitate a round of internal training and limited-period disruption for some teams, these decisions tend to be deferred in favour of status quo.

Extreme Prudence On Customer Acquisition Spends

A rising tide lifts all boats. When things are upbeat most start-ups benefit from the buoyancy and feel good about their business prospects. However, when the tide turns, panic sets in. Often entrepreneurs feel that the slowdown is specific to their business and are tempted or guided to spend more on customer acquisition. This is unlikely to lead to any lasting gains.

As demand dips, the efficiency of marketing goes down. So, a startup ends up burning a lot more money just to hold on to a certain position. When the burn is tapered off, the “customer relationships” propped up by the burn wither away and the business settles at a lower, more stable point.

In a slowdown, it is ok to grow less or even settle at a lower level. Spending a lot of money to first grow fast, then to hold the level and finally to roll back is wasteful. Smaller steps that move one sustainably forward is a much better approach to build lasting scale.

Entrepreneurs would do well not to fight the reality but instead adjust to it rapidly. It is better to pull back on marketing and instead focus on user experience and organic growth.

When the tide turns again, this smaller but satisfied cohort of users will help propel the business ahead in a strong way.

Shorten Expected Payback Periods

Uncertainty is a part of the business – whether it be a macroeconomic situation, technology-led, user behaviour related or competitive dynamics. In times of heightened uncertainty, it makes better sense to work on tighter time frames than longer ones for payback on your spends. Now is not the time to push for 100% growth rates at negative unit economics. Now is the time to fix the unit economics of the business.

If, as an entrepreneur, you were working on a two-year payback for your projects, tighten it into one year now. If it doesn’t make business sense in a year, the chances of it being any different over two or three years are still less.

Say No To Embarking On New Adventures i.e. New Businesses/Acquisitions

Slowdowns and crises are the times to dig in your heels and not to stretch yourselves thin across new initiatives.

While going through a challenging phase, it is better to double down on existing projects and priorities rather than starting new projects of passion. Taking on-going projects to completion adds more value than starting more projects with long term intent. In such times any significant, forward-looking investments are best avoided or deferred.

Do Talent Replenishment Where Needed

Building a team is not a linear process. Hiring is done depending on the nature and quantum of anticipated work requirements. When the business cycle is subdued, hiring needs to be precise and thoughtful. If a team member leaves, any replenishment should be well-considered and not automatic.

It also makes eminent sense not to hire aggressively. Instead of hiring ten engineers in one go, it would be prudent to first hire five, deploy them and then assess the balance requirements vis-a-vis the other skills needed in the team etc.

Fix The Broken/Missing Plumbing

In high growth spurts, there is often no time to fix the plumbing. All resources are geared to service this growth. However, the “plumbing” of technology, culture, and customer experience needs periodic updation to set the business for long term success.

In phases of modest growth, an inward-focused approach helps execute such maintenance activities, which play an important role in operating a long term, healthy business.

Focus On Building Capabilities

Don’t just get sucked into the daily firefighting during an extended crisis like we are all in currently. Times of subdued growth provides a good opportunity to build or strengthen capabilities that create lasting value for the business. For instance, executing projects that drive higher conversions or improve customer experience create tangible value by improving key business metrics that add to the bottom line.

Not all capacity creations require money – some require time, effort and management bandwidth. Business slowdowns provide the right window of opportunity for such projects to get off the ground.

Strengthen The Culture

Organisational response in times of crises is the pillars on which the company’s culture is built. It is relatively easier to be supportive and open in upbeat times. But, it is in times of crisis that team members look for care and genuine concern. Small, thoughtful gestures count for a lot and create lasting bonds between the company and the team.

For instance, creating a virtual helpdesk for team members and their families in case they face any exigency is very reassuring. Or do a video call in small groups with the broader team – not just the leadership team.

Clear and consistent communication is the lifeblood of a company’s culture and more so in challenging times. Any major decisions, any impending shifts in the organisation’s strategy should be shared with the team proactively and with clarity to avoid anxiety.

For instance, doing daily check-ins with your team and ensuring everyone is on the same page and has gotten the opportunity to express their point of view. Equally important is to be extra nice and courteous to your colleagues, especially given virtual meetings over Zoom/Hangouts can quickly devolve into something very transactional.

Set The Right Expectations With Investors And Employees Around Growth Goals

Challenging times are better handled when key stakeholders are mutually aligned with intent and action. Typically, investors prefer strong momentum in their portfolio companies.

They also have a shorter investment time frame for the business compared to the entrepreneurs they have supported. The entrepreneurs, on the other hand, can afford much longer time frames and can easily absorb three years of high followed by two years of low because of their longer operating horizons.

Decisions about business strategy in demanding times should be determined by thinking about what the business can sustain. A high momentum strategy that ends with the company running out of funds and imploding is in nobody’s interest.

It is important here that discussions be anchored around meaningful business metrics like unit economics and margins rather than vanity metrics that while indicating an upwards trajectory are essentially driving the company off the cliff.

Stay Positive

It is the nature of entrepreneurship to swing between irrational optimism and deep despair. Headwinds during challenging times impact all businesses, but individual start-ups may feel under siege under the assumption that this is specific to their business.

In times of such volatility and uncertainty, it is important to be driven by the needs of one’s own business and not respond in a panic to what competitors and others are doing.

It is better to have flexibility around scale and timelines rather than rigid, predetermined notions benchmarked externally that won’t adapt with change in the situation. When the external environment is challenging, it is most important to keep one’s head in the game and resolutely prepare for better days.

Settling for lesser growth, reducing scale, eliminating loss-making practices, pricing adjustments etc will help the company be in control of its destiny. Winning is important – but not giving up is paramount.

Intel’s Andy Grove said it well: “Bad companies are destroyed by crisis, Good companies survive them, Great companies are improved by them.” Let yours be amongst the great companies that are improved by this crisis.

Here To Help 

Getting some external counsel and perspective when faced with business crossroads can often be of great value. It gives one the confidence to see a setback as a setup for a comeback.

I have been fortunate to receive some very valuable counsel from industry seniors at crucial points as we built Snapdeal over the last decade and more. Having learnt from them and through my personal experiences, I am happy to offer my perspective to entrepreneurs, who are in the early phase of their journeys and are now tackling economic and societal adversities.

Finally, it is important to be optimistic about the fact that this phase will pass, and we must also utilise the current circumstances to do things that bring joy to our lives as well. Given we are 100% WFH currently, I am reading every day to my 4-year daughter and recording her book reviews. It takes 10-15 minutes a day, but it is a lot of fun! Please do find your moments of joy in these times.

Wishing you the best always as you chase your dreams. Stay safe!

[This post first appeared on LinkedIn and has been reproduced with permission.]

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.