The last few years were amazing in term of opportunity to develop your startup.
Governments printed money like there was no tomorrow and this result in a surplus of free cash. Investors could afford to fund even the most extravagant idea could receive funding.
The key word for the past few years was finding your niche and if your niche was “too broad”, you can find an even smaller niche.
Apps such as finding the nearest bathroom in a city were pitched by startups and even build and investors still see a sense to fund such projects.
Fast-forward 2022 and things are about to change completely.
The funds become scarcity resource. High inflation and low certainty and confidence for the future trigger VCs and angel investor to both step back and assess carefully their possible investment options.
I attended recently an event called doing business in times of economic slowdown.
In this article, I will present some of the highlights I took away.
First, let us meet the speakers of that event – Lukas Uhl and Matthijs Welle. Lukas is the formal CEO of Zoot. Zoot is a very big and recognizable brand in the Czech Republic. The core business model is on-line clothes retailing business. Matt is the CEO of Mews. Mews is designed to simplify and automate all operations for modern hoteliers and their guests.
The pandemic hit very hard both companies and their business models and they had to take serious measures to restructure and heal the companies.
Lesson one: manage your costs.
When the pandemic hit, Zoot was pushing hard to grow faster, and this become unmanageable. This is relatable to many startups who priorities the first years of their development to growing and capturing market share. Think about companies like Facebook and Uber that lose money for many years before they reach profitability.
“Zoot was focused on growth, but lose money on every t-shirt.”
When the investors lose their confidence in the market, the amount of cash companies could use and burn to grow becomes limited.
“Act fast and do cost cutting. “ Lukas
Therefore, it is far better to manage the costs and re-invent the business model. Sustainable business model will ensure that the company will last for a long time. The same fate reach Matt, who based on some criteria and metrics predicted that his company needed to last for at least 2 years and after creating that strategy, he created a plan how to cut costs.
What I like in Matt’s approach is that they did only one deep cut and after that, reassure their employees there won’t be another one. They could afford to do that since they had a plan and had calculated for how long they can sustain the company with the current worse case and what they could do in the future. On the contrary, other companies introduce regular hire freeze, yearly or they have a bad way to manage their resources which could influence negatively the moral of the employees or to the talents who would like to join that company.
Lesson two: always have a plan
Do not blindly do things, hope for the best, or even worse, do nothing, and expect the crisis and issues to go away. Always have a measurable and actionable plan with milestones based on relevant metrics!
My take away from the talks is that the metrics you look for when you grow a company are different from metrics when you reach economic stagnation and are different when you try to raise funds. Always know what are you measuring and why! Metrics like net revenue growth or the cost of customer acquisition, customer lifetime value and retention are very useful. What metrics do you use to ensure you are striving in your field?
In the company I work for, there are also metrics capturing the customer satisfaction and metrics capturing employee perception about the leadership and the company focus.
If you don’t have metrics, now is the time to introduce them.
Lesson three: focus on A players
Matt mentioned in the talks about his strategy for retention. He wanted to keep the senior and most productive people and in the future focused on hiring experience one. This seems contra intuitive when you want to cut costs, but the value such talents provide outmatches the costs. They had focused on building a cutting edge internal system which they offer to their clients and this was possible only because they keep the senior and experienced people in their team. Think about, is your company saving on costs, just to hire many people for a low pay or does it strives for innovation and really invest in the professionals. It is significantly more expensive to hire people, then to keep them.
Lesson four: overcommunicate
When asking the panel how they did manage to keep their people on track with the unpopular changes, including the huge firing, one of the answers was overcommunication. Matt had hosted Q&A every week where the employees could ask questions, including the possibility of asking anonymous questions. What I like in this response is the empathy. As CEOs of their businesses, they must not only know their business very well, but also they must know what to expect from the people who work for them. Not everyone will feel comfortable asking their questions publicly and in time of crisis people usually spread a lot of rumors. That is why it is important to explain over and over again why those rumors or fears are incorrect. Of course, if you try to deceive your employees and what you said initially turns out to be false, this could lead to reputation damage. That is why it is important to explain everything as honestly as possible.
Lesson five: are you number one in your segment?
During economic decline, startups that are at the top of their segment have the highest change to get the needed funding. A few years back, startups could get a lot of money. This trend is gone. Now startups have to work hard and show metrics and convince potential investors that they are worth investing. If you are not number one in your segment, this is significantly decreasing your chances of funding. Focus on your customer and the value you provide and cut all other unnecessary projects to the minimum. If you are unable to reach the top place, then focus on lesson one and plan your startup accordingly. It needs to survive these difficult times. This might mean cutting costs.
Lesson six: use the crisis
“When life gives you lemons, make a lemonade!” Lukas
Lukas shared with the attendees how an incorrect article in the Czech Forbes helped them save a lot of money. They were in the middle of modifying their business model by removing the physical shops people could go to try the clothes. The problem is their contracts were long term and they could not easily cancel them without paying a fine. Then one day Forbes come with an article that Zoot was going out of business, which was not true. Instead of wasting energy trying to dispute this, he used this article when calling the property owners and it works.
How can you, as an entrepreneur, use the bad times? Maybe you need to cut on many useless projects and focus on core activities?
Or you procrastinated a pivot on your business model? The time of crisis could be the most creative and transformational time for you and your business.
I hope you liked this article and you can take away something which will benefit your business.
Please let me know what was the best lesson you could use?
Do you agree with them and can you add something more based on your own experience doing business in times of economic slowdown.
I would like to thank the Lighthouse venture for organizing this talk!