As a founder, it’s easy to say, “Of course, we’ll pivot!” But actually pulling a pivot off is no easy feat. How do you set yourself up for success in this new world? Which levers should you pull first? How do you ensure you can secure capital when needed or that your company is undeniably fundable?
Right now, becoming undeniably fundable should be every founder’s north star. It denotes that you’ve built an efficient company that will without a doubt garner venture capital attention and funding when the time is right.
Surface and scrutinize efficiency KPIs
As you begin the road to becoming undeniably fundable, you must prioritize KPIs that represent efficiency. Vanity metrics have taken the backseat in this new world, and there will be few paths forward for you if you don’t prove you’re efficient.
There are five key efficiency metrics that matter:
In this new chapter, CEOs must think like a CFO.
- Growth rate: The pace at which your annual recurring revenue (ARR) is scaling. Can you still grow 2x or 3x year over year right now? How does your product need to change?
- Customer acquisition cost (CAC): The amount of money you need to spend on sales and marketing to acquire one customer.
- CAC payback period: The time it takes to recoup the cost of acquiring a customer. Shoot for a time span that’s less than 20 months.
- Gross margins: The cost of servicing customers with both your technology and your people. The industry standard is about 75%.
- Burn multiple: The amount you are spending to generate incremental ARR. 1x is amazing but less than that is even better. Popularized by David Sacks, this metric has been a guiding light for my current company, as this metric doesn’t lie. You can’t hide spending or stash costs in other departments. It exposes the cold hard truth about your spending, growth and cash collection.
Examine your business and change your priorities
Once you have a strong grasp on your efficiency metrics, it’s time to take action. Regardless of your segment, industry or customer type, I believe you need to do the following.
Scrutinize your budget and shrink it to essentials
As a founder, you must dive deep into every department’s budget — don’t leave it to others. There’s no room for fluff.
Take stock of personnel costs
The odds are high this is the number one line item on your budget. I consider hiring as a one-way door, so you must maximize this investment. Who do you have on the field? Who is hungry? Who is productive? How do you get the most out of your existing team?
Be clear on what drives business
When I worked at Salesforce, we employed a method called Vision, Values, Methods, Obstacles and Measurements (V2MOM) for setting annual and quarterly goals across the organization. I use this same model at my company.
Talk to every customer
Prove your product’s value and ROI in order to secure your renewals.
Prioritize increasing annual contract value
Drive annual contract value (ACV) by ensuring your sales and marketing teams are aligned, budgets are prioritized and sales effectiveness and productivity remain consistent. Multiyear contracts should always be the goal. Putting ACV on the board could be harder than in years past and will require more input from your executives on every deal.
Culture is critical
Inspire your employees to be part of the new reality and communicate clearly that you’re all in this together. Bring your employees into the conversation, reiterate that times are changing and explain how you can all meet this moment. CEOs meeting behind closed doors with their CFOs does the opposite of inspiring camaraderie and collaboration.
Plan to prevent poor performance
When faced with a recession, you must hope for the best, but expect the worst. If you’re not actively planning for various scenarios, you may be too late. Map out three clear paths forward: The happy path, the OK path and the doomsday path.
For each scenario, work back 12 months from when your money runs out, because this is when you’ll have to start fundraising. At that moment, ask if you will have strong efficiency metrics in place. Will you be undeniably fundable?
The idea is that every day, especially in a volatile market, you should be able to make decisions that align with any given number of situations according to your multiscenario roadmap.
Think like a CFO
The majority of founders fit into a certain mold: They are visionaries and entrepreneurs who are inspired by disrupting a market, building a product and amplifying their message. Most founders, with a few exceptions, are not financial experts. They do not obsess over balance sheets, modeling or profit and loss statements.
But in this new chapter, CEOs must think like a CFO. This means sitting out some of the “fun” meetings and pushing passion projects to the side. Focus on your unit economics and become an expert in your business. You must know your efficiency KPIs like the back of your hand and wake up every day thinking about putting your playbook into practice. You must focus on operating. The rest will follow.
Once you have a strong grasp of your new model, your next step will be to communicate what’s ahead to your employees. If you make what’s happening in the world around us transparent, then employees will buy into the pivots and changes in strategy. If you rally your employees to care, you can influence change to drive efficiencies.
Embrace the opportunity ahead
The next few years will likely be rocky. Some companies will succeed and others will fail. But with every storm comes a silver lining. For early stage companies, the swim lanes are widening and the market is becoming less saturated.
The next big startup that could have encroached on your business might not get funded. Your big competitor could have failed to acquire a strong product or team. These months and years could be an opportunity to lace up your cleats and race past the competition.
The landscape has shifted and founders need to shift with it. We’re not going back to the sugar high of the past decade anytime soon, but with integrity, strong leadership and operational efficiency, we can not only survive, but thrive, in this economy. Now is the time to guide your team to becoming undeniably fundable.