Here’s How Your Start-Up Can Not Only Survive the Recession But Actually Come Out Stronger

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It is April of 2020 and we’re entering a significant recession.  As they say, winter is here. 🥶

While each downturn is different, there are common ideas and practices that have been proven to work from one recession to the next. 

Here are some of my thoughts from a geezer that has scars from the crashes of 2000 and 2008.  Some of these are obvious and some are non-obvious but hopefully, they will help you manage your business successfully and grow while others merely try to survive. 

Get the CFO on your side.

The CFO has much more power in downturns than you think — do everything you can to get her on your side.  If you are selling to a company, see if you can sell to the CFO. 💸

If your product can save the company money, they are going to be much more interested in using your services. In a recession, finding cost savings becomes very attractive. If the CFO is your advocate based on the numbers, you are going to have a much easier time selling.  🤑

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For example, open-source solutions (starting with LINUX) really took off following the dot-com crash. This is because companies realized that they could replace super-expensive SUN boxes with cheaper (yet still powerful) LINUX units. Many for-profit companies benefited from this trend.

If you are a SaaS company, prioritize customers that are doing what you are doing in-house.  Often you can find companies that are paying over $1 million dollars a year to do what your software does for $60k.  And yes, your software might only do 80% of what their in-house solution does… but is that extra 20% really worth $900k+/year? Probably not. 

This is also true in the B2C world — in downturns consumers look to save money. Groupon was the breakout company of 2009 because they rallied around saving groups of people money. Sometimes capital constraints can spur innovation. 

If you can find a way to save your clients’ money and get CFOs on your side, you can grow your business during a recession. 

Conserve cash.

Duhhh! This should be completely and utterly obvious. 

If you are profitable, great. Focus on understanding your costs and risks of lost revenue.  I’m personally a pretty conservative manager — LiveRamp was profitable in 2013 and 2014 (when we sold the company). SafeGraph was profitable last year (in 2019).  But even if you have a profitable business, check out your cost structure. Recessions will likely put some of your business at risk. 

Under perfect circumstances, you are sitting on two years of runway to allow you to take advantage of opportunities during the recession. There is no better time to try and make fair, long term deals with synergetic companies. Having cash makes that possible. 💰

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If you are not profitable, start cutting costs now.  It is never too early to cut. Think hard about unneeded vendors, contractors, etc. and find creative ways to save money. Also, don’t be shy about asking for discounts on rent, especially if everyone is working from home.  

If you have debt, this is the time to engage with your lenders to change terms.  They don’t want to end up owning and running your company (you don’t want that either) so they will be incented to work with you to make sure you are not a long-term concern. You will have much more credibility with them if you show them you cut costs prior to talking with them. 

Let employees trade cash for equity.

Some of your employees will be excited to get more equity in your company and might be in a position to take pay cuts to do it. 

While this is not an option for most employees, you might want to allow the few that do raise their hands to trade cash for equity. 

You have to be careful, though, about how you do this so you don’t create a taxable event for your employees (or your company). Always consult the lawyers. 🔖

You might also consider forgoing cash raises and bonuses and giving out more equity instead.  

Yes, many venture capitalists will fight this but it is ultimately in their best interest for your company to conserve cash in these times. Plus, giving equity to employees is more meaningful and goes a longer way than giving it to the VCs.

Pay less for rent.

You have the best chance of lowering your rent check if you have a short-term lease, like a WeWork space. In a recession, you can often find substantial discounts on rent going forward, either with the space you are already in or by changing spaces. 🏢

Collections: be the squeaky wheel.

Many of your customers will try to string out their payments to you.  I get it, they are hurting. If they used to pay you in 30 days, now they might try to pay you in 90.

Don’t let them.

Call them and be the squeaky wheel.  Call them when they are just one day late. Shame them if you have to (“hey, I’m just a little start-up … can you late-pay Google instead?”).

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Do everything you can to bring in cash. All your customer success, sales, and support people should know when a customer is late so you can all apply pressure to the customer.   

In addition, consider offering heavier discounts to get customers to pay up-front.  I remember saving the company in one economic downturn by convincing a customer to pay three-years up-front.

You can’t grow if you don’t get paid – be the squeaky wheel. 𐃏

Pay your vendors as fast as you can.

While your customers will be trying to string out their payments, you should do the opposite. Pay all your vendors promptly and immediately.  

Of course, if you are overpaying for something, you should renegotiate.  But otherwise, pay for things right away — don’t string out your vendors.

Paying your vendors will bank goodwill.  It will endear yourself to them. They will be more likely to give you super service and prioritize your features.  And they will remember you forever.  

Just like you want your customers to pay up-front, offer to pay your key vendors upfront.  If you are 100% certain you are going to be using these vendors a year from now, it could be smart to pay up-front and get a discount.  A bunch of 20% discounts goes a long way.  

Be a low-maintenance customer and reap the rewards of goodwill and discounts. 

Wartime CFOs will be more valuable than peacetime CFOs.

CFOs that are great at cutting costs, renegotiating vendors and extending runways are more valuable in a downturn than those that are generally focused on growth. Cost-cutting CFOs can have a 5x return on their salary immediately.  

Most start-ups usually opt for peace-time CFOs. This style of CFO works great during a period of economic expansion, but when a recession hits, they do not want to do the dirty work of renegotiations and collections. They are out of their element.

If you have a peacetime CFO, consider having an explicit conversation with them about their recessionary approach. If you are lucky enough to have a wartime CFO, they will be worth more than their weight in gold.  

Triple down on the thing the company does really well. 

In my article, The New Status Game for Companies: Fewer Employees, I write: 

“Crazy thought experiment: Imagine a new type of company that decided to only do what it was really good at and essentially outsourced everything else.”

In a recession, it makes even more sense to triple down on the things the company does well. The smaller and more focused the team, the faster it can move. 

And the closer you stick to the core function of what the company does (and the less bureaucracy/overhead you have), the easier it is to get everyone rowing in the same direction to outrun the storm. 

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When the world is changing fast, the spoils go to the fast-moving teams.

One thing for sure is that the world is changing very fast.  When that happens, it is important that we change with it. One cannot have a calcified strategy.  One cannot be stuck in their ways.  

In the world of change, tempo is king.

One of the reasons Seal Team Six is so effective is that they can move with great speed and react rapidly to unplanned events.  Remember, one of their helicopters crashed when they took out Bin Laden … and they still accomplished their mission and all got out alive.  

Never stop looking for new 10xer talent. 

Most companies are not focused on recruiting and talent acquisition during a recession. That’s a mistake. If you can find and hire a 10xer who shook loose from another company, you’ve just added 10x value to your own at a time when you need it most. 

Never stop looking for talent.  Companies’ prospects change quickly, and you need to be ready if a star employee decides to jump ship for higher ground. 

If you have cash, go on offense.

If you are lucky enough to be sitting on cash and don’t have a lot of burn (or are profitable), use your cash as a weapon.  Company valuations will always be more attractive in a downturn — so look to add M&A to your growth strategy.

SafeGraph was already looking to do 1-2 acquisitions in 2020. Now we hope to do 2-4 acquisitions this year.  

You can buy companies outright and you can also buy divisions from companies.  In 2009, some companies sold their unprofitable divisions for $1 just to get them off their books and stop subsidizing them. 

Be patient, and there will be many opportunities to play offense if you have cash. 

Good luck. I hope your company not only survives the next recession but actually comes out stronger. 

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”. ― Warren Buffett.

Special thanks to Thomas Waschenfelder for his help and edits.