I have looked at tech from both sides now (h/t Joni Mitchell), as a three-time entrepreneur and as a venture investor through two downturns.
On the startup side, my first company, VXtreme, was acquired by Microsoft and became the platform for media streaming over the internet. My second experience was the rocket ship run up to an IPO and subsequent nosedive in valuation that characterized so many startups in the dot-com era.
My third startup had been in the market only a year when the internet bubble burst and had not yet found product-market fit. To survive, we had to take drastic measures, including two rounds of layoffs until we were able to merge with another company, which is still thriving today.
As a venture investor, I have invested in over 60 companies, and while many have gone public or been acquired, the journey has included pivots, near-death experiences and navigating through the 2008/2009 downturn.
Today, as people throw around scary words like cram downs, structure, ratchets, illiquid portfolios and wind down of funds, I truly empathize with founders of companies who are having trouble raising capital, have seen their valuation drop and are making tough survival decisions.
Every era is different, but here are some tips for our new normal:
If you’re out raising money, due diligence your investor
In a time of contraction, firms with funds that are close to their end of life will be under tight constraints and may not have allocated enough follow-on capital for their existing investments.
Reserve management can become an issue, and existing investors won’t be able to come through on their pro-rata amounts, especially if you’re conducting internal rounds or bridge extensions. So, as part of your evaluation of investors, you should ask which fund they are investing from, how far along they are in investing it and how much they hold in reserves for future rounds.
This will help you ensure that they can continue to support your future capital needs.
Be creative when tightening the belt
When capital is scarce, you have to be willing to kill your darlings so you can extend your runway.
At Rivio, my third startup as a founder, we came up with a zero-based budget plan after the dot-com bust that assumed we’d have no access to any future capital. We then drastically cut product features, re-thought our go-to-market strategy and rightsized the business.
Going through the two rounds of layoffs was the hardest thing I have done, as I had to let go of people we had hand-picked and thought highly of, some of whom were close friends. However, as a result, we bought ourselves the time to pivot and merge with CPA.com and build a sustainable business.
I spoke with Jake Winebaum, the founder of B2B portal Business.com, about what he learned from the 2000s. They had assembled a world-class team from places like Dow Jones and the Financial Times to create original content on companies and industries. They also had a team building a business-focused search engine and directory with a performance ad model.
In response to the crash, when analyzing the business, they found that 80% of site activity was in search and directory but that represented only 20% of costs. But for the content side of the business, it was the other way around. In response, they cut the content business, reducing staff from 135 to 25.
Now lean and much more focused, growth accelerated, they became profitable, attracted new investors and had a successful strategic exit in 2007. Jake advises startups to honestly assess their business, saying that more companies die of indigestion than starvation.
Tap the downturn sales and marketing strategy playbook
As the pandemic drove the world digital, enterprises bought the products they needed in the future. With all those accumulated resources, it’s not going to be easy to sell tech that penetrates through the backlog.
Companies need to hone their value proposition so that their product is seen as helping customers navigate today’s problems. Our portfolio company, Cube, is focusing on scenario planning in uncertain times rather than on the efficiency of their financial planning and analysis software.
You can also tap sales strategies developed during prior downturns, such as giving deals to customers, deferring payments, following the buy now, pay later model, bundling, etc.
For example, our company SolarCity innovated around allowing customers to lease solar panels versus paying for them up front during the 2008 financial crisis. Another company, WorkSpan, co-sold packages of their partner ecosystem platform with AWS and Microsoft in 2020 after businesses began pulling back. These offerings were embraced by customers because they were low cost with high ROI, saving them time and money when it meant the most.
It might sound counterintuitive, but it makes sense to continue investing in building your brand. It’s easy to lose brand value but hard to build it back; anchoring your brand demonstrates that you will be around for the long run, and it gives confidence to your existing customers whom you want to retain and upsell.
Another entrepreneur from our portfolio, Rehan Jalil, says you can be the accident if you pay too much attention to the other accidents around you because of the excess money intentionally injected into the system and now being drained systematically. His previous startup raised an up round through the weeks of the Lehman meltdown in 2008 and closed its largest customer a few months later.
It’s important to remember that as stressful as these times are for founders and investors, layoffs happen to people when burn rates decline. Employees are nervous about losing their jobs, and leaders must practice consistent and clear communication as they weather this downturn.
If you need to lay off staff, treat them with dignity. Right now, we are advising companies to help employees understand the headwinds they are facing and include them in making the tough decisions rather than just delivering the bad news.
Show empathy by actively listening and use both body language and verbal cues to communicate. Further, you can’t panic, as your team will look to you for guidance. Anxiety is contagious, and panic can undo any positive steps made during a crisis.
Company building is a marathon, not a sprint
I learned this lesson the hard way at my second company as a founder, iBeam Broadcasting. We got carried away by the prevalent wisdom during 1998-1999 that companies could be created overnight.
We neglected establishing product-market fit first before ramping up burn and prioritizing growth at all costs. In retrospect, we should have factored in the concept of sustainable growth in the long run, waited to go public and kept our burn rate in line with the stage of the company.
Founders should remember that building a company is never a straight line — there are many twists and turns along the way, and there are no overnight successes.