Building in a slowdown
It’s a challenge for founders at all stages to find a way to grow, scale, and thrive during a down-cycle. We break down some ways that may be done.
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⚯ Treading the new economic reality
We’ve been here before. Approaching a down cycle. The advice is flying thick and fast, and there are Twitter threads on how and what to do to survive. There’s also so much noise about how the bear market will pan out for companies. But despite this, founders talk to us about the things that they plan to do to make it through this.
We need to talk about it despite there being enough noise. It’s not just because we want to say our piece. No, SaaS founders are going through a unique cycle. There is capital available for early-stage founders, even if slightly harder to come by as their companies mature. But building it right at this point in time will help them reap the benefits for years to come. Now is when founders can future-proof their companies. The fact of the matter is that this is a unique slowdown. We haven’t seen it like this before. Not only are we reeling from the effects of a pandemic, but there also is a war in Europe and there is a supply chain crisis caused due to incessant lockdowns in China. The length and severity of this slowdown may not be something that can be predicted, which makes the way companies and founders react differently than the way they did before.
This is something that deserves serious thought and understanding. So we reached out to Manav Garg, founder and CEO of Eka Software Solutions, and part of Together, to ask him what he believes founders should do during this strange time.
“In uncertain times like these, the suggestion is typically to wait and watch instead of trying to predict which way the markets will go.” - Manav Garg
The right parallel
First things first. Most founders understand this, but it still bears mentioning that the current situation for Indian startups is more comparable to the 2015-16 slowdown.
It is broadly similar from a funding perspective. We’re just coming off of a year of crazy valuations and fundraising.
There were 42 unicorns in India last year. This year, between January and June, there were 14 unicorns, higher than the 13 in the same period last year. There was similar euphoria in 2014-15, with record funding rounds and unicorn valuations.
Over 2016, the market took a more realistic view of funding, investors lowered their risk appetites, and the overall capital raised was a little over half of the peak we saw in 2015.
So this is a natural down-cycle after what many call crazy growth the past two years, very similar to the scenario in 2014-15. There are, however, a few differences that make this economic cycle different.
From the beginning of this year, there has been a global fall in tech valuations, a record high inflation in western markets, rising crude oil prices, the Russia-Ukraine war, and a tech clampdown in China.
And though India hasn't officially entered a bear market yet, we’re getting close to that possibility as well.
Where does this leave us and our founders? With the very real possibility that the bear market will hit private markets, eventually. We’re already seeing this play out in the US, but the India story has significant differences.
“These situations have come together for the first time in maybe 50 years, which makes this situation very complex. This makes it very hard to predict how long it's going to last, and whether we'll have a recession. If we have a recession, how hard will it be? In uncertain times like these, the suggestion is typically to wait and watch instead of trying to predict which way the markets will go,” says Manav.
📒 From an overall company perspective, the conversation should start moving more towards profitability now.
Navigating
A lot depends on which stage your startup is at. If there was a list, by no means exhaustive, it would include:
Your stage of capital raising.
Have you reached product-market fit?
Do you have an MVP?
What are the metrics you’re using to measure these milestones?
How much capital do you have in hand?
What are areas that require spending the most? Where can you cut down?
Are you burning a lot of cash to buy growth, or is it organic?
Figure out if you’re default alive or default dead
Once you have this picture, it becomes easier to decide where you can become more prudent in terms of spending, and what needs to be fixed
“From an overall company perspective, the conversation starts moving more towards profitability. From that profitability, you will be able to invest back whatever you can into the growth of your company,” says Manav.
The key parameters founders need to watch, according to Manav, are:
Net Run Rate (NRR)
Payback Period, which includes customer acquisition cost, cost of sales, etc.
Churn
In the past six months, SaaS company amplitude has seen its market cap drop by ~50%.
Building your product
Founders always like to say their product is never complete. It’s always a work in progress. But let’s start with those who are at the MVP or concept stage and those who have some sort of PMF.
For seed and early-stage companies who are not spending on growth yet, the impact of a downturn is minimal. This is also the reason investors are usually more willing to put money into early-stage businesses.
For seed stage companies, the focus is very different, remarks Manav. “You're going to build a product, so whichever way the market is going, you just focus on R&D and building the product,” he says to entrepreneurs in the seed stage.
Figuring out sales
For early-stage companies with few customers, continued investment in sales is a good idea, but they should watch out for the cost of customer acquisition and churn, especially if you’re in the $2-10 million revenue bracket.
Sales cycles are going to get longer, and patience in this market is key. Unlike a bull market where everyone is growing, you need to understand the different layers of markets, says Manav. Not all will grow or slow down at the same pace.
“The payback period becomes really important here. Is it less than 12 months or 24 months? Measure it really well, so you can make sure you're investing in the right area,” Manav says.
“Understand the reason for customer churn and offer a solution accordingly. For example, if your product is non-mission critical for the customer and they don’t have budgets, consider offering them a certain free period,” he suggests.
For IPO-stage companies, Manav insists that they have to move towards profitability.
He doesn’t recommend retrenchment until it’s the last option. It’s better to offer pay cuts and keep the team together than to dismantle it.
Making hires
Most companies who are in the early stage need to make hires. There is plenty of capital available for them. But we’re not in the middle of a bull run, and these companies will have to be smart about how they hire.
It’s a good idea to create ownership within key hires. Help them buy into the company by offering ESOPs.
Don’t compete on salary but on the opportunity. Founders are selling their vision and their company to new hires.
The one thing seed stage startups need to comprehend at this time is the cost of talent. “You need to figure out what is the optimum cost of talent for you. And talent should stay with you and remain motivated to build the best product,” he adds.
Building runway for a bear market
Keep a cash runway to last for a minimum 24-30 months.
In addition to your cash burn, keep an eye on your revenues. Consumption patterns are going to change in the current market, so having cash in hand becomes that much more important.
Keep in mind that raising money in this environment will not be as easy as last year. Seed and early-stage startups may find more takers than the big bang fundraises we saw last year. This played out in the 2016 funding cycle too.
Increasing focus on your core business line goes a long way. Double down on what is working for you.
Balancing growth with profitability will be critical for larger companies. Ruthless, unchecked growth does not always mean success in the long run. “If you have scaled above $10 million in revenues, instead of growing by 80% and having a negative EBITDA of 20%, you can grow by 30% and be profitable,” says Manav.
Great companies have been built in previous downs cycles because businesses learn to operate frugally during times of economic uncertainty.
The dependence on the next round of capital comes down, which should ideally be the default mode a startup operates.
As investors, our eye is always on growth.
As founders, your eye should be on PMF, fulfilling customer needs, and moving fast if something doesn’t work.
This is also the time to understand and develop deeper connections with your customers and market.
Do not forget
A few general things that will go a long way in dealing with these uncertainties better:
Keep your ear to the ground.
Talk to founders who have gone through an economic downcycle. History is important.
Understand your larger market—its changing needs and consumption patterns.
What Together has been up to
Reimagine marketing: Our colleague Manav was on a roll this month. He wrote three pieces on the unsolved challenges in the world of B2B marketing. These stories urge founders to think beyond digitization and automation.
Tell your story: Our colleague Avinash wrote a very interesting piece about telling your story. He spoke to Ruchin Kulkarni from Toplyne for it. This 6-minute story is something you must read to understand how Ruchin imagined storytelling not just to build a brand but also convince customers to believe in their product.
Some social media popcorn
Founder-led sales is the best way forward for early stage startups.
Learn from Tally’s growth strategy.
That’s it from us for the month. If you believe you’ve got an idea that we need to hear, write to us. We’ve got an exciting guest lined up for next time. Until then, stay safe, and let’s build Together.