The Times They Are A-Changin’

I was born in 1962. The year of the Cuban Missile Crisis, the year Marilyn Monroe died, and the year the Beatles released Love Me Do. Yes, I am that old. But age brings some benefits. For example, I am entering my fifth recession as an adult. Been there, done that.

That comes in handy these days because with VC valuations crashing back to earth, many founders are coming to me with very different questions from just six months ago.

Questions like: ‘’How long will this last? How should I deal with it? Can I raise money, or is the tap closed?”

For many younger founders, this might well be your first recession, and this means other firsts are on the horizon, e.g. first big change of plans mid-course and perhaps a first big layoff. So, I thought I would share a summary of the many conversations we’ve had with our portfolio companies since the beginning of the year.

First and foremost: headwinds or tailwinds? That is THE question.

There is an assumption that recessions equate to tough times. They do at the macro level but not necessarily at the micro level. Also, recessions in Europe may be different than in the US or China. But during recessions, everyone looks for productivity, efficiency and low prices. How does your product suit user needs?

If you provide your customers with real and immediate productivity tools or mission-critical applications, this may become a tailwind for your business. You will have opportunities to gain market share, innovate, and accelerate your growth. It is during recessions that Google and Facebook have emerged as leaders. So there! It’s not all bad news.

If you are in a tailwind situation, this is surely a good time to accelerate your product agenda, or even buy a competitor if you happen to be blessed with a sufficient pool of resources. Understanding your competitor’s cash and competitive position, as well as your own, will be more important than ever.

In contrast, if a recession sends headwinds your way, it is crucial for you to have the courage to recognize your position and make tough decisions. Only then will you buy the option to make it through to see the next upcycle.

Should you have many years of financial capacity, then preserve cash. Focus on retaining customers and adjusting the size of your organization for leaner times (Yes! Get rid of average performers that are slowing you down) while continuing to invest in product gaps for the next cycle. If done properly, you should then reap the rewards of your patience.

So what’s different, and how would I tackle the situation? Let me suggest five specific points and action items for you to consider:

1. Cash is king — make sure you have enough

If you have more than 18–24 months runway, extend it, but keep meeting with investors, including current and potential VCs, so that they can track your accomplishments and build conviction for your next round. They will meet with you.

If you have fewer than 18–24 months, you probably need to raise now to buy more optionality — get a bridge or a down round if need be. And frankly, it will be a good test to see if your current backers really believe in you, your story, your team, and your strategy. Better to know it now.

2. Right size the team — but don’t sacrifice innovation

Recessions are always good opportunities to clean house. Don’t downsize; rightsize so that you have enough people to support your next growth phase. For instance, if you have the option, keep some of your very best recruiters, as you may need them 12 months from now. The market for top talent is still very hot, so you need to build a culture and structure that distinguishes you from the pack. Make sure your staff feels valued and knows that you’re still investing to take the business to the next level.

3. Be brutally honest about your competitive position

That is true of both your financial situation and your competitive position. This changing environment is a test in leadership. If you are not in a position to invest in product, you can be sure some of your competition will, and your asset may then lose value rapidly. If that happens, M&A might be the right path to exit. There is nothing wrong with saving your company by joining forces with a larger and better capitalized competitor. You’ll keep your team and the fruit of your hard work intact if now part of a broader story.

4. Change your plan, then change it again

These are times of high uncertainty. Whatever plan you put in place will probably be obsolete within 100 days. Prepare multiple scenarios at all times — if you don’t have several now, you are behind — and be ready to act on them when the trigger shows up. Your board should also be supportive and help you make dynamic tradeoffs as the situation evolves.

5. Overcommunicate

Now more than ever, be in close touch with all stakeholders, including your customers, your employees and your board. That will help you keep your organization aligned and your best talent on board, even if half the time you won’t have the answers to their questions.

At Inovia, these are the types of conversations we’ve been having with our exec teams, showing the way in true partnership with humility because we’ve been there, and remember exactly how it feels.

Carpe Diem!