Running your startup in tough economic times

Successfully navigating tough economic times requires you to make big cuts and to double down—and it’s hard to do both.

975 words • 5 min read

The era of “growth at all costs” has clearly ended, and startup founders are now staring at each other, concerned. Is my company now unfundable? Are my expenses out of control? Where should I be focusing?

The good news is that the fundamental requirements for making your startup successful are still the same. Your job is to make something that people love, that they’ll pay you for, and that you can market and deliver efficiently. (Or at least, with a clear, high-conviction path to eventual reasonable efficiency.) This will always be a successful strategy, regardless of the state of the funding landscape.

But there are two pieces of bad news: (1) you could previously get away with deferring “efficiency”—and you can’t anymore, and (2) raising additional capital is going to be very difficult.

If that’s the case, you now urgently need to improve your efficiency to both (a) extend your runway, and (b) paint a compelling picture to investors when VC investment resumes.

But improving efficiency isn’t as simple as it sounds: you can’t cost-cut your way to success. You have to have the conviction to cut what needs to be cut, and the conviction to double down on the must-wins.

Understand what you need to cut back on

Your revenue growth in 2023 is not going to look like what you expected it to be in 2022. And that’s okay. The silver lining is that you now have a unique opportunity to refocus on the things that matter most: your team, your customers, and your financial metrics.

This isn’t a year for expensive, aggressive experiments. Almost all of the discretionary projects and initiatives you’d planned should be put on hold. You’ll need to be especially clear on what your top priorities are—no more than a single-digit number—and keep your resources laser-focused on them.

If you know that revenue growth is going to be slow, you have to scale expenses down proportionally. The easiest place to start is low-ROI activities. To cut back on those, you actually have to understand the ROI of each dollar you spend. If you do, it’ll both help you stay on the path to long-term success, and also clarify your decision-making. Can’t decide whether to keep Initiative A or Initiative B? Keep the higher-ROI one.

Next, target ones that are super high-variance: ones that might yield a home run but might also totally fizzle. Pause those in favor of measured investments in initiatives with quantifiable, known-to-be-good, safe results.

As an example, at Pilot, we ran a series of billboard campaigns in San Francisco in 2019, and then again in late 2021. We’d previously thought about doing it again in 2023—but we’re no longer going to. Similarly, we’d thought hard about introducing a new product line in 2023, but we’re going to press pause on that as well.

Finally, be clear about what your must-dos are: for any given initiative, the deciding factor is no longer “Is this a good idea?” or “Will this yield eventual returns?” Instead, the question to ask yourself should be, “Do we have to do this to succeed in 2023?” If the answer isn’t yes, defer it.

Double down on what’s necessary

You can’t cut your way to success. You have to make sure you’re not starving the engine that actually drives your business.

This is a great time to focus on really nailing the experience for your customers (who are also scrutinizing their expenses closely). It’s never unfashionable to have customers that are enthusiastic promoters of what you do.

You also can’t neglect the investments that are needed to drive your long-term growth. If the success of your business requires you to unlock a new vertical or develop a new piece of technology, you must continue funding it. If you don’t, you’ll wake up one day to find economic conditions have improved, and you’ll be in no position to take advantage of it.

As an example: let’s say you sell a software product to dentists, and you’re doing an incredible job selling it—you’re the most popular provider to dentists, and it’s clear that in a few years you’ll be in 80% of dentist’s offices. To continue growing at the rates you’d like to grow, you conclude that you’d also like to sell to doctor’s offices—but some product, sales, and marketing changes are required to enable that. You have to continue investing in those changes, because they have significant lead time. If you don’t, you’ll saturate the dental market and your growth will stall. That is a necessary area of investment for your business to be successful in the long-term.

For early-stage startups, this is still a great time to get your product into the hands of customers. If you’ve found customers who are willing to purchase your product in tough economic times, you know you’ve uncovered something that will have even greater market pull when conditions are better. And if you haven’t found that, then it’s especially urgent that you make the investments needed to get this figured out.

A note on team psychology

It’s critical that you’re transparent with your team about the obstacles ahead, and your plan for overcoming them. If you’ve hired well, you have a team of competent adults who will see through bullshit and will resent it.

Instead of sugarcoating a challenging situation, be direct and honest: Here are the facts, here’s our plan to get through it, here’s why we’re well-positioned for success, and here’s why—as a result of our combined efforts—we’re going to emerge stronger on the other side.

The foundations of startup success are always the same: make something people want, that they’re willing to pay for, and that you can deliver with reasonable economics. 2023 is a unique opportunity to refocus on the core: your team, your customers, your must-win efforts, and your financial metrics.