As the CTO and founder of CloudHealth Technologies (acquired by VMware in 2018), I am intimately familiar with the razors edge existence on which startups live. A startup typically derives its revenue from a single product or service, spends more cash than it takes in, and lives on the law of small numbers (e.g. one of two deals can be the difference between success or failure in a month). While a successful startup’s “burn rate” will decrease over time until it becomes profitable, this can take years, during which the business must rely on periodic infusions of cash from investors in return for giving up equity and/or control. Raising capital in good times can be challenging, but doing so in a downturn can be hard if not impossible for some businesses.
Sequoia's ”black swan” letter to its portfolio companies earlier this month was a reminder to us all of the decisions facing startups today. While less flashy than their 2008 “RIP Good Times” presentation (with its photo of a hunk of meat with a knife stuck in it), it was just as direct and provides this sage advice:
“Having weathered every business downturn for nearly fifty years, we’ve learned an important lesson - nobody ever regrets making fast and decisive adjustments to changing circumstances.”
This advice is central to the questions that should be asked in every startup right now: should you take action swiftly and ensure the long term viability of the business, pull back a little, or just wait and see? Burn rate and cash on hand will be critical in your decision making. Most businesses have already taken the obvious moves to preserve this cash - e.g. expediting accounts receivable, delaying or renegotiating terms for accounts payable, stopping or delaying hiring, and reducing non-critical spending. But the longer this goes on and the less cash you have to operate the business, the harder the decisions you will need to make. Should you cut staff in some functions? Can you cut entire functions of your business? If you cut people expenses, should you cut deep once and get it over with, or take a risk of having more than one cut? Can you even raise capital in a market like this? If yes, under what terms?
Things may look bleak now, but they will get better. Now is a time to reaffirm your commitment to your business, to look for wins wherever you can find them, to focus on the health and well being of your staff, and to innovate in your respective products and markets. History has shown that some of the best companies get built during a market downturn - e.g. Facebook in the Great Recession, Google in the dotcom bust, Cisco after the 1987 crash. The adaptability and innovation required to succeed in an unforgiving market tends to bring out the best in some companies, who then thrive when growth returns. So maintain your spirits, make the hard decisions, and know that someday you will be able to say to other entrepreneurs: "Your problems sound really hard... but I was one of the Black Swan Entrepreneurs who brought my business through Pandemic of 2020."