Lessons for Startups from the Last Downturn: Secure Your BASE

In this article, Burkland CFOs Marc Zablatsky and Katherine Gaffney share lessons for startups from the last downturn.

• Marc Zablatsky has a 25-year track record of financial leadership, fundraising and accelerating growth for early-stage startups, turnarounds, and international organizations ready to scale. He is a builder of businesses that leverage technology to have a positive impact on the world.
• Katherine Gaffney is a CFO, Advisor, and Investor to high-growth, venture-backed technology companies. She has proven success in leading organizational change through strategic planning, financial management, and operational improvements. 

Lessons for Startups from the Last Downturn: Secure Your BASE

Most Startup Founders have never been through a financial downturn. They are used to having a clear view of where the company is headed and the pathway to accelerated growth. 

In this “New World” all of a sudden startups have to do multiple rounds of scenario planning and contingency planning, fill out waterfall analysis, and then wait to see if their Board will want to make drastic changes.  Perhaps there will be layoffs or worse. Hard-charging founders are now forced to wait.  Wait to see if the economy opens back up. Wait to see how their sales will be impacted.

With business suddenly stalled and the next quarter uncertain, the Founder’s vision for success is, at best, hazy.  

At Burkland, we suggest not waiting, but looking within and asking:

‘What are the lessons for startups from the last downturn that I can learn from to help me take advantage of the opportunities progressive companies experience when the uptick starts?’

Fortunately, valuable insights and lessons for startups can be gleaned from the 2008 recession which was studied extensively by the Harvard Business Review (HBR).  In 2010, the HBR analyzed the financial decision made during the last recession and identified four key types of companies:  

1. 1. Prevention-focused companies: Companies who focused on employee layoffs and deep cost cutting, a natural defensive strategy to keep the company afloat. While 21% of founders and CEOs take this approach, it’s the least likely to come out stronger in a downturn. 
   2. Promotion-focused companies: The 26% of companies who spent their time and budget into offensive moves like market development and asset investment without cutting costs. They fared better than the deep cost cutters, however, optimistic delusion often leads to groupthink and blindspots occur. 
   3. Pragmatic companies: Achieved a balance of defensive and offensive moves, however, not the perfect combination, 29% of companies.  
   4. Progressive companies: 37% Situationally used an optimal combination of defensive and offensive moves 

In order for a startup to be Progressive, it’s founder must first uncover and remove his or her own decision making biases, in order to avoid becoming too defensive or too offensive. Removing personal bias will allow clarity into the exact right combination of moves.

One of the easiest ways to remove overconfident and limited-vision bias is to have third parties review the landscape and give alternative options. Your CFO, Advisors and Board members can play devil’s advocate and allow a founder to see moves that they didn’t even know existed. A CFO (with their fiduciary responsibility) would rather accurately predict/forecast the future than create an alternate reality to please people initially and be wrong in the end.

• One tool we recommend founders use to check their bias is the Decision Making Checklist by Mckinsey. 

Once you have decided to take a Progressive approach and worked to remove your personal bias from your company outlook, it’s time to create an action plan.  

Progressive Action Plan (playing offense and defense at same time)

Marc lived through the 2008 Financial Crisis, and experienced firsthand how critical it was to not take existing customers, employees, sales team and investors for granted (together referred to as the BASE).  This BASE is where your focus should be while the world is in turmoil.  If your BASE is strengthened you will be well positioned for growth as the economic haze starts to lift.  We refer to this type of action planning as “Secure Your BASE.”

How to Secure Your Startup’s BASE

1. Be Highly ‘Existing-Customer Focused’

It always costs more to lose a customer than to gain one, but this is especially true during times like these. Extending and raising LTV is one of the best ways you can outlast a downturn, and be stronger in the long term. Becoming laser-focused on your existing customer base gives you an opportunity to focus back on product-market fit and understand where your product is working and failing. This is a perfect opportunity to revisit your customer persona and ask yourself the question:

‘Are we serving our core customer? How can we do better? ’

1. 1. Start with customer success by way of implementation employees themselves. Are they happy? If they’re not happy the first experience your customers have is with a disengaged, unhappy employee, which is very likely if you’d had layoffs. Solicit internal feedback on employee satisfaction and engagement. 
      1. Revisit your customer experience: implementation to exit.
      2. Create more frequent check-ins, invest in superior customer service
   2. Segment your customers buying psychology to understand your land and expand opportunities as well as how to update your product positioning based on purchase behavior  
      1. If the product is solid, this is a time to land and expand
      2. This might also be a great time to cut unprofitable clients or segments so you can focus on more profitable areas 
   3. Look at your TAM data from when you started, what’s your market penetration?
   4. Revisit your customer personas – what has changed for your customers? How can your product adapt? Have any new customers emerged? 
   5. Implement a Net-Promoter Score or similar customer feedback tool if you haven’t already.
   6. Have pricing conversations early. A CFO can be crucial in analyzing pricing elasticity as well as helping with scripting for customer conversations. Be prepared to have mechanisms to quickly change your customer’s pricing and terms.  Ask yourself if it is better to keep this customer at a lower rate or lose them for good (very difficult to get clients back after they disengage.)

Many companies are cutting costs but forgetting to look for opportunities. Investing in customer service is one area progressive startups may want to think about. This will ultimately lead to higher market penetration and give unique insights on where you should be looking for your next customers, which is an offensive move in a downturn. 

2. Revisit Your Sales Strategy & Compensation

A knee-jerk reaction many startups will take is cutting sales and marketing. This is a common approach, but what cuts are made and where is the line between being too pragmatic versus being progressive. 

• Research has shown that moving from a Consultative Selling approach to a Challenger Sales approach is more effective in a downturn.
• Sales and marketing must get granular in focusing on verticals and segments within your target customer profile and any new customer profiles that may have emerged from the recession.
• If you correctly visit your customer’s pricing elasticity, your marketing team can use the data on spending behaviors and change their marketing tactics to companies more likely to spend in a downturn. 
• Revisit your sales metrics and focus on understanding your top-performers strategy, numbers, and characteristics.
• If sales are predicted to remain flat, re-think compensation for your sales people, focusing on activities that support your new strategy.
• Create closer ties between your Sales and Customer Success / Service team.
  • Expansion within your existing customers may be your smartest path to growth.

3. Focus on Organizational Efficiency 

Organizational efficiency should be the number one goal of all startups in the downturn. By creating increased efficiencies, your startup will be propelled to scale faster as we come out of the downturn. Although capital at the moment comes at a high price, once the market stabilizes, startups will have the opportunity at cash again, and with cleaner metrics will get a better valuation. 

• Review the 5 revenue leaks in your organization and tighten up your lead to cash cycle. 
• Create a few KPI’s (likely in your waterfall analysis) that are unambiguous and easy to follow to start focusing on improving operational performance. 
• Look for ways to create better cross-functionality and communication between teams to create faster internal alignment, which leads to faster implementation of objectives. Can new tools save time? 
• Start looking at ways to save time. Progressive companies focused on assets – buying tools that would create greater operational efficiencies and save time. These are the investments that you should be making into your business. 

4. Stay Close with Investors, Advisors & Mentors

Staying close to those who believed in you in the start is a must as many start-ups will rely on their original investors for their next round. Having access to information quickly and leveraging your support system’s network could prove vital in overcoming key hurdles during the next phase of the downturn. 

• Be completely transparent about your issues and don’t be afraid to ask for advice or help.
• Consistently communicate with your investors and continue to drive towards expected.
• Look for advice from advisors, mentors and investors who are intimately aware of the industries your customers are in to get some prognostication of what’s headed your way.
  • Don’t forget to always ask these insiders for new customer introductions.
• Don’t be afraid of doing an insider round, having extra runway is now more critical than ever and those closest to you are the best source of capital in a downturn.

Looking Forward…

Do not put your plan together in a vacuum.  Study lessons for startups from previous downturns. Include your BASE (customers, employees, investors and advisors) in the plan research, formulation and review.  Develop KPIs and compensation plans that are consistent with this new vision as well.  Then let the company know your vision (over and over again) so everyone is focused in the same direction. 

Downturns Provide Lessons for Startups, And Opportunities for Startups

Downturns do not last forever, but they tend to have a long-lasting tail for companies that do not focus on “Securing their BASE”.  If this is your first downturn there is one truth that comes out of every downturn: Opportunities.  If you come out of a downturn in strong financial shape with a better understanding of your customers, your team and the markets you serve you will be ready to take advantage at the first signs of an uptick while your competitors will be waiting for the boom that eventually follows.