Experts have been forecasting some degree of economic downturn since the pandemic began in early 2020. For example, Deloitte analysts have developed multiple possible scenarios, the best of which is that things stay at the status quo (higher inflation, elevated government spending, etc.).
There is no way to predict how long this will last, but we at Flint Capital have developed a plan to help you and your business weather the storm.
1. Accept the Reality
The downturn is here, and it's unavoidable regardless of how your company is performing now. Expect less capital, less consumer demand, fewer investments, and a major slowdown in business procurement.
All of these factors (many of which we're already seeing) will result in smaller revenues and higher expenses because developers' compensation will continue to increase.
It's a perfect storm of factors that will substantially shrink your margins, so it's better to accept this early.
2. Prepare in Advance
Now is the time to act quickly. Delaying or "hedging your bets" will likely be fatal.
You're the general of this battle of keeping the business run smoothly. You must take quick, decisive action to preserve funds before you see a marked slow or decline in revenues.
The faster you act to control expenses and margins, the more likely your business will live to fight another day. Motivate your team to "strap in" for wartime, and they'll come out the other side hungry and alert for new opportunities.
Getting your whole company on the same page without hesitation is how you can preserve (and even build) revenue growth.
3. Develop Model Scenarios
Your company should have three fully developed scenarios: Baseline, Pessimistic, and Disaster. This sounds ominous, but there's no room for optimistic planning right now.
Focus on the Disaster scenario, and take immediate steps to mitigate those risks. For example, if revenues drop 50 percent, you're already in a disastrous situation. Make sure the company survives even if that happens.
Engage your team in fleshing out these scenarios. Assigning cooperative tasks allows for more cohesive and conscious work whenever the time to implement your plan arrives.
4. Prioritize Burn Control
Cash flow during a downturn is more important than revenue growth. Calculate your burn rate (here's a simple, straightforward guide if you need assistance), and ensure you have a runway of at least 24 months.
In addition, be sure your burn multiple is as low as possible. The goal is to survive through the downturn so you can take over the market share vacated by competitors that didn't make it.
5. Focus Your Investments
Resources are limited, so focus your efforts on investments that drive profitability and maintain an overall positive EBITDA.
Investors are currently more interested in prioritizing companies with positive EBITDA over fast growth or market share. The capitalization of fast-growing companies has declined by 60 percent on the NASDAQ, but businesses generating positive EBITDA have lost less.
Those who can demonstrate a path toward positive EBITDA within 18 months are poised to be market leaders. If in addition to that you can show 50 percent growth of the revenue, you'll have investors lining up.
6. Secure Funding
Now is the time to make a capital grab. If you've secured your recent round, keep going. Go to venture debt. Don't be afraid to accept a flat or lower valuation.
Remember that a small percentage of something that survives is more valuable than a large percentage of something that fails. (After all, 100 percent of zero is still zero).
The value of growth-stage startups plunged 30 percent in the first quarter. Right now, everything hinges on the early-stage runway, which is why I recommend 24 months. This gives you the flexibility of valuation and helps decision-making.
7. Hire When the Time is Right
Once you've completed steps 1-6, you can think about hiring. You'll be in a perfect position to hire great people who were unlucky enough to work for businesses that didn't follow steps 1-6 in time.
When your business is secure, you have an opportunity to pick from excellent hires that will strengthen your team. However, it's best to wait until the crisis has fully hit to implement this part of the strategy.
The Downturn is Coming. Success Now Depends on You.
The economy is going to slow down. The turn has already begun in some respects. Now, the question isn't if or even when, but how big and how long will the downturn be? Don't be caught unawares. Begin this seven-step strategy to avoid the worst of the difficult times ahead.
