I started my last company in mid-2009, just as the market was beginning to recover from the fallout of the financial crisis. In the past several years, surrounded by fast-growth startups with sky-high valuations, many of us forgot what the downturn felt like.
Today, things are changing. Again, we’re facing economic uncertainty on a global scale — the S&P 500 began 2016 with its worst performance since 2008, and plunging share prices for companies like LinkedIn and Tableau show that the tech industry is no exception.
The last recession taught me that challenging market conditions offer advantages, like less competition and better access to talent. My co-founders and I recognized an opportunity, and explored dozens of ideas for a new business before landing on a customer service tool for small and medium businesses. We built Assistly into a successful company and were acquired by Salesforce in 2011.
As tech funding begins to dry up and the markets waver, entrepreneurs need to adjust their approach. The lessons I learned from starting a company after the last economic meltdown apply today: Don’t get caught up in growth-at-all-costs without considering the following…
Do what you know will work (build a painkiller, not a vitamin)
We chose to pursue the idea for Assistly because we knew it solved a real problem. Businesses need to invest in customer support no matter what — you’ve probably heard that it costs less to keep a customer happy than to acquire a new one, and we’ve found that to be true. In any economic cycle, but especially a tough one, you don’t want to do something sexy; you want to do something foundational. If you create something people need, you’ll thrive when the markets are low, as well as when they’re high.
In 2009, we needed to bet more conservatively than we might have in 2013 or 2014. Ultimately, it was a smart decision. Many of our other ideas would have involved more risk: unproven market fit, a learning curve for our founding team and considerably more capital from outside investors. In that climate, we couldn’t afford it.
Our founding team had domain experience in customer service. We’d all worked in the industry in some capacity, and we knew how to monetize the product. We could hit the ground running, which meant less time spent learning on the job and making costly mistakes. This baseline gave us more runway (and confidence) to get started in a tough cycle.
In a tough economic climate, positive cash flow is the best leverage you can bring to an investment conversation.
We surveyed the market to create a prototype and identified the clothing brand Bonobos as our ideal customer; they’re tech-savvy, they take pride in their customer support organization and they’re active on social media. As it turns out, their needs were significantly different than what we’d imagined. We worked closely with them to rebuild a core part of the product, then began to roll out this version among other early customers. Once we had 10 major customers on board, including Twitter and Yelp, it was time to raise money.
Grow within your means and work toward sustainable profitability
Over three months, we met with more than 30 VCs and got ~30 “no”s before our first “yes.” We heard a variety of reasons for passing, many of which contradicted each other. Most investors seemed shell-shocked by what had happened in 2008; they just weren’t ready.
True Ventures eventually said yes, in part because one of their partners had worked with me at AOL. Even with this relationship, it was difficult to secure a $1.7 million Series A — a sum that in 2014 would have been considered a seed round. It was huge for us.
Phil Black, True Ventures’ founding partner, asked us right off the bat how much of the $1.7 million we planned to burn, so we created a plan for curbing spending. We hired conservatively and carefully planned the unit economics of the business: the revenue and costs associated with each user. We released our beta version three months after funding and started to charge for the product shortly thereafter. We quickly saw revenue growth.
When there’s a surfeit of venture capital in the marketplace, as we saw in 2013 and 2014, founders have more leverage when it comes to fundraising. The result is fast growth, high burn rates, bigger funding rounds and inflated valuations. In a volatile market, like the one we’re seeing today, startups need to break even — or at least have a realistic plan to get there — before continuing to grow.
In a tough economic climate, positive cash flow is the best leverage you can bring to an investment conversation. You’re more appealing to investors, and you don’t need outside investment to survive. You can fuel your growth with revenue rather than with venture capital, and that means you have more control over the future of your business.
Lessons for a recession, and common business sense
Product-market fit and profitable growth are the biggest factors I consider when investing in a company or working at one. They’re a large part of the reason I joined Campaign Monitor, an email marketing provider that the founders successfully monetized, with no outside investment, for more than 10 years. The past eight years have underscored the cyclical nature of the economy — and the need for businesses built on fundamentals rather than growth-for-growth’s-sake.