Navigating the downturn
This is a note we sent to our customers last week about how to navigate the downturn—with a specific focus on concrete, actionable recommendations—and I wanted to share it here as well.
Dear founder,
You’ve no doubt seen the recent news: in the broader economy, inflation is at 42-year highs, and US consumer sentiment is at 10-year lows. Late-stage venture capital investment slowed at the beginning of the year, and earlier-stage investments are seeing a similar slowdown. Valuations and revenue multiples have significantly decreased, for both private and public companies.
Basically, it’s scary out there, and if you’re proceeding as though it’s business-as-usual, you’re potentially setting yourself up for pain later. It’s not all bad news: some of the most iconic technology companies have been built during downturns, but advisors who have seen similar market conditions previously recommend navigating the situation thoughtfully.
Our recommendations
Know your burn rate, your forecasted burn, and how much cash runway you have. If you have less than 18 months of runway, you almost certainly need to take serious action.
Make sure that you and your executive team understand all options for increasing runway, and what tradeoffs those imply. You don’t have to act on all of them, but you should understand their impact: both in terms of how much time they will actually buy you, as well as what they will mean for your business’s trajectory.
If you’re mid-fundraise, close your round as soon as possible. In the unlikely event that you have the opportunity to raise more now, you should probably do it—don’t fixate on your old valuation or the terms your friend’s company got six months ago.
If you can’t raise money now, be sure you understand what you need to achieve to unlock your next fundraise, whether it’s launching your product, reaching $10m of annual revenue, or getting your burn multiple under 1.5x. If you’re not sure, this is a great conversation to have with your board or current investors. Make sure there’s strong alignment on the team about the importance of hitting this goal, and a clear plan for getting there.
Consider the following options for increasing the cash in your bank account:
Increasing revenue: Can you sell more, either to new customers or existing customers? Can you raise your prices without materially hurting demand for your product or service?
Improving gross margins: can you reduce the costs of providing your product or service, so that the same customers generate more cash for you?
Improving payment terms: can more of your customers prepay for longer periods of time? (e.g. can you get more of your customers to prepay annually?)
Decreasing costs: are there expenses you can reduce or cancel? Are there longer-term investments you can safely defer? Are there new hires you were planning on making that you can postpone?
Unfortunately, your main expense is likely personnel. If your plan requires layoffs, best practice is to commit to doing it ASAP and make a deeper cut than you think you have to, so that you don’t have to do it again.
Monitor your leading topline indicators weekly. (Leads, user engagement, sales pipeline, etc.) If new business grows more slowly than you thought it would or if customer churn is higher than you expect, you’ll need to react rapidly—because you may need to update your cash burn forecast. Pre-plan with your executive team what actions you’ll take if you’re straying from your plan.
Clearly communicate your plan and progress with your team. Don’t let rumors or speculation about your company’s health become a distraction.
Be human. Act decisively and intentionally, but remember that your employees, your vendors, and your customers are all people who will remember how you treated them. Don’t avoid hard decisions, but behave in a way you’ll feel good about when you reflect on it in the future.
Ways we can potentially help
Your Pilot books contain a basic burn rate report. This report assumes that your revenue and expenses will remain constant, but it’s a good starting point for thinking through your plan.
If you’re a customer of Pilot’s CFO Services, we can help you build out a revised forecast or operating plan, which we can update and discuss with you on a regular basis. (You’ll still want to keep a close eye on your KPIs, but it can be nice to have the additional support.)
We’re hosting a one-day virtual conference for founders on June 15. Pilot’s own CFO Paul Jun and Greylock’s Sarah Guo will be presenting an especially relevant session entitled “How to navigate turbulent markets,” which we’d encourage you to join if you’re interested.
Finally, I know this stuff is hard, and there aren’t a lot of people you can talk to about it. If you find yourself in need of a little founder-to-founder therapy session, just hit reply and we’ll find some time—or you can book office hours with us here.
We’re rooting for you.
Thanks,
Waseem and the Pilot.com team