As a serial entrepreneur, I have had the misfortune of going through two major downturns – first, the Dot Com crash in the late 90s and then the global financial crisis related crash in 2008. We have now had a major market crash almost every decade for the last three decades. These downturns are extremely hard to predict and it’s virtually impossible to prepare in advance of these downturns. Typically, the markets have generally done extremely well before the crash and the crash happens with surprising speed with the markets dropping 30% or more in a matter of a few weeks. These downturns can also last for several years making it even more challenging for startups to cope with the situation and make it through the downturn without going under.
These recessions are typically characterized by massive layoffs as companies look to conserve cash as their revenues take a significant hit. Consumer demand is also similarly affected. Startups, in particular, are highly vulnerable as they have limited funding and their revenues take a hit as companies and consumers cut back on non-essential spending. Raising funding becomes extremely challenging as VCs slow down their pace of new investments and focus on their existing companies. Valuations also take a significant haircut as valuations of comparable public companies also get significantly affected.
When these downturns happen, it is extremely important that you move with a great sense of urgency and put together a plan that hopefully gets you through the market crash in one piece. Make sure to get advice from your board which has likely been through these situations in the past and can help guide you through the crisis. However, it doesn’t also have to all doom and gloom. Remember that many great companies like Facebook and LinkedIn emerged during the depths of the Dotcom crash and thrived despite the challenging circumstances in which they were born.
It is very likely that your revenues will be significantly affected by a market crash. The impact is often more for startups since most companies and consumers will likely view their offerings as non-essential. You will need to, therefore, cut your expenses at least proportionately to the loss of revenues that you are experiencing. The other factor to consider is that you will need to make your existing funding last much longer as raising funding will be very challenging. If you were planning on raising funding in the next 12 months, plan for 18 months. As a result, you will have to cut back even more so you can last for a longer period of time.
Unfortunately, employees typically make a significant portion of the cost structure of a startup. In most situations, it will be hard to avoid doing a layoff which can be very difficult to do for most startup founders. However, if your revenues have declined significantly, you will have no choice but to move forward with a layoff. However, heartless this might sound, you need to move quickly on this front as otherwise you will be hemorrhaging valuable cash every month that you wait to take action. You should also plan appropriately in terms of how many people you should layoff. Founders are typically reluctant to layoff people and they will initially make a small cut and then later realize that they have to make more cuts resulting in rolling layoffs over an extended period of time. This can be extremely demoralizing for employees who will be left wondering if they are next. You should, therefore, make the hard decision to make one deep cut and stick to that plan as long as possible.
Another option that you can consider is to institute pay cuts across the company. The percentage pay cut could vary across founders, management team and employees. Founders, for example, could stop taking a salary if they can afford it or take a 50% pay cut. Management team could take a 25% pay cut and employees could take a 15% pay cut. Try to limit the duration of time that you institute the pay cut. If the economy turns back up again, you should re-institute the original pay that management and employees had received prior to the market crash.
In March 2000, when the Dot Com bubble burst we faced a similar challenge. Fortunately, I had raised $15 million in funding for my company TeamOn and was fairly frugal in hiring people especially compared to other Dot Com companies that had hired hundreds of employees. My board gave me very clear direction to cut back on our headcount and we had to go through a very painful reduction of employees from around 60 employees to 25 employees. I announced to the company that I would stop taking any salary to demonstrate to my employees that I was more than willing to make the necessary sacrifices to ensure the survival of our company. As a result of these steps, we were able to make our funding last well into 2002 when we were finally acquired by Research in Motion (BlackBerry).
Employee layoffs are never easy and they should be handled with dignity. You should have each manager personally talk to each affected employee and tell them how sorry they are to take this action. Give the employees enough time to collect their belongings and say goodbye to their colleagues. Give them at least 2 weeks of severance which is the least you can do under the circumstances. Finally, contact other CEOs and recruiters you know and send them resumes of your employees in case other companies are able to hire your employees.
Renegotiate Vendor Contracts
You should look at any significant long term commitments to see if you can reduce them. At TeamOn, for example, we had a real estate lease for a larger space than we needed especially once we had significantly cut back on our staff. I went to my landlord and was able to convince him to cut back on the space that we had committed to. Fortunately, the landlord was eminently reasonable which helped significantly reduce our monthly outlay on rent. At the end of the day, it turned out well for the landlord as the company expanded its space significantly after the acquisition by RIM.
Be Flexible with Customers
Just like you need vendors to be flexible with you, you need to be flexible with your customers. If your customers can’t afford to pay you all that they have committed to, postpone the payments to until later. You will create lasting customer relationships as a result. In the financial crisis, one bank, for example, converted all their loan payments to interest only payments in order to lessen the monthly payments that its customers had to make for a period of time. Zoom, for example, has made its offering free for schools during the current CoronaVirus crisis. Also, spend time understanding if customers have any special needs that you can better satisfy. For example, iCertis, a contract management company, heard early on that their customers were looking to their contracts to understand and address the commercial implications of the current crisis. They deployed a swat team to help customers with this data analysis.
Be Transparent with Employees
Any major crisis will create a significant amount of concern among your employees. They will be afraid that the company will go under or that they will lose their jobs. It is very important, therefore, you take action quickly and communicate a clear plan of action to your employees. Don’t shade the truth – your employees will see through any spin and will stop trusting you. If you are upfront with your employees about the challenges that you face, you will find that they will step up and go the extra distance to help the company succeed. Remind them about the mission of the company and why it’s an exciting mission that they can rally behind. Communicate often and highlight the progress you are making and celebrate even small successes. Point out where certain employees have gone beyond the call of duty to secure a deal or help their customers.
Secure Venture Debt for your company
During any major crisis, venture capital financing will seize up for an extended period of time. And those that are still investing will only do so at a significantly lower valuation. In these situations, it would be prudent to look at venture debt as a way to extend the runway for the company and allow the company to raise funding when the markets have recovered. Of course, even the venture debt lenders will be cautious about who they lend to and you will only be able to raise funding from them if you are able to demonstrate that you still have a sound business model (despite taking a hit on sales). I have twice been able raise venture debt during the Dot Com and the global financial crisis and can vouch for the flexibility that this funding has enabled.
If you liked this article, check out my book that covers all aspects of the entrepreneurial journey.