Operational and finance tips for early-stage startups in a tough market
There is no question that this market is tough for tech startups. The market meltdown today can be compared to the dot-com meltdown in 2000 and the Great Recession meltdown in 2009. But even in tough markets, there are many survivors. This article explores survival tips for startups — for both operational and corporate finance. For the many companies that do survive, there will be an opportunity to grow faster since fewer competitors will fight for market share and corporate finance conditions will improve.
An excellent example of survival is Amazon, which was on the verge of bankruptcy in the dot-com meltdown in 2000. Amazon’s stock price plummeted from $106 to $10. Amazon survived by pivoting to selling internally developed technology to others — selling its e-commerce platform to other retailers through Amazon Services and selling its cloud computing technology through Amazon Web Services.
How tough is the market?
This market meltdown is tough on an historical basis:
Venture Capital (VC): Global VC funding in Q2 2023 fell to $65 billion, down 49% compared to Q2 2022.
Private Equity (PE): PE firms deployment is down a similar 49% in Q2 2023 from the quarterly peak reached in Q4 2021.
M&A: The M&A market for VC-backed startups in the U.S. is on its slowest pace since 2013, as the world’s economy was coming out of the Great Recession in 2009.
IPOs: 55 IPOs have been priced so far this year. The last time there were fewer IPOs was 2009 in the Great Recession.
Operational survival tips
For a company in survival mode, cash is king. Review a cash flow report, not a GAAP report, every day. Slow down paying vendors and require payment from customers in 30 or even 15 days. Focus sales efforts on quick wins that bring in cash, not elephants.
Cut expenses to the bone. Think Elon Musk sleeping on a couch. Review every line item. Consult with employees on areas to cut. Even small items like canceling subscriptions will change the corporate mindset from growth at all costs to a path to profitability.
Shifting the goals to a path to profitability fits with the new investor mantra, the Rule of 40 — if a company’s revenue growth rate is added to its profit margin, the total should exceed 40%.
One area to explore is using AI to perform tasks such as creating legal documents, generating key words for SEO, and writing software code. Almost 30% of new GitHub code is now written with AI assistance.
Unfortunately, terminating employees is sometimes necessary for a company’s survival. Be transparent with the employees, management, and the board. Consider furloughing employees and not terminating them to retain talent.
Finally, consider a hard pivot like Amazon in 2000. Listen to the market to determine where the demand is for a company. What other products or services can the company provide and what other market can the company serve?
Corporate finance options
If a company has a limited runway, pursue multiple corporate finance options simultaneously. Do not pursue the next VC round, run out of money, and then try to pursue M&A. The M&A process requires at least six months.