Trial by fire: This year will expose the best and worst tech startups
Markets go up, then they go down. That is the way they have always worked, but we always seem shocked when the pendulum swings the other way.
Even before the coronavirus started to put intense pressure on global markets, the tech startup sector was heading for a rude awakening. For months we have been reading about the problems at SoftBank VisionFund-backed companies. WeWork, OYO, Zume, Rappi, Fair, and others had too much cash, too much ego, too little focus, and too few checks and balances. SoftBank is the bogeyman of the day, but it wasn’t the only one bankrolling big pitches from bigger egos. Much of the startup world is built on hype where audacity, storytelling, and technology bring outsized returns to a lucky few companies … until they don’t.
Yes, it is getting harder to raise money. Yes, corporate customers are taking longer to make purchase decisions. Yes, the coronavirus and the trade-war between the United States and China are rattling investor confidence. But, we knew some kind of slowdown was coming. I remember having a conversation with one of our investors in London in June of 2018 about the coming recession. He had co-founded a hugely successful fintech company. We agreed it was coming but weren’t sure it would be in the next 12 or 24 months. The mess bubbled up within 12 months.
A slowdown means fewer customers, longer sales cycles, less traction, and a much harder time fundraising, which is the lifeblood of most startups in the early years. A downturn is also an opportunity – for startups that play their cards right.
You snooze, you lose
In the best of possible worlds your startup should be sitting on a whack of cash now. Many companies passed on equity investments last summer because they thought they could get better terms from investors later. Others with traction passed on debt deals they thought were too “aggressive,” forgetting the fact that most startups are lousy credit risks with experimental products, making their products even lousier asset risks. Now, you can forget about debt. If you are lucky, your existing investors will stick by you, probably at lower valuations than you thought possible a few months ago. There is still a lot of money out there. If your existing investors have the market clout, they can help bring in a few more quality new investors.
It’s all about managing your cash
Cash is king. You knew this, but you hired twice as many engineers as your closest competitors. You knew this, yet you spent hundreds of thousands of dollars on architects for your swanky new penthouse offices. Now you pay the rent on that penthouse but continue to work out of dingy offices as you can’t afford to finish the new ones. The old guys like Warren Buffet and Charlie Munger are not crazy – cash is king. If you are not generating cash now, then at least don’t spend it on things that won’t generate it in the near-term future.
Hug your customers, tightly
Corporate executives are under huge pressure to do as the neighbors do – cut costs, delay expansion, forego new technology, and wait for the storm to pass. Smart executives know that all crises pass and build their companies to take advantage of the opportunities these times of flux bring. Help your customers build the case for the transformative power of your technology by developing ROI models together, taking a longer-term view on pricing, and helping them with their market development.
Dance with the one that brought you
One of the first things you should do is visit the decision makers of your key customers. Don’t sugarcoat the situation. Let them know you know how difficult their situation is and that they are under pressure to delay investments. Admit you could do better in serving them in many respects – more responsive product development, more consistent support, better communication – and show them the road-map of how you will make that happen. Then ask them for their purchase timeline – “if we do this, this and this, when could you commit to a purchase?”
Focus, focus, focus
Startups are like teenagers, focus is not their strong suit. But it is not solely their fault, as investors reward flights of fancy and pivots, until they don’t. The one consistent question my team gets asked by investors lately is, “Did you sign that deal we talked about last time?” They are nervous, just like the executives who run the companies who need to sign these deals, so they want less hokum and more reality. Resist the temptation to look for “better customers.” If your product isn’t doing what you promised it would do, it is not your customers’ fault. Focus on making it do what it’s supposed to do. If you don’t, your “better customers” will need to be dumber customers, and those are few and far between. You have invested much time and effort in building the relationship with these customers, convert all that effort into a marriage that works for both. Love at first sight is rare in romance, it is rarer in business. If you keep floundering around for the “right customer” you will never focus your improvement efforts on yourself – and that’s where the problem lies.
Leadership trumps timing, cash, product/market fit, and even focus
Crises are a time when leadership comes to the fore. Rising tides lift all boats and hide many leadership faults. Falling tides expose the underside of your boat – to investors, customers, and employees. The scary part is that you are naked. The great part is that you are naked. Big platitudes, big visions, and big declarations will take a beating in the next few years. Big honesty, big leadership, and big customer focus will be rewarded.
Milan A. Račić is a co-founder and Chief Growth Officer of Gideon Brothers, a robotics and AI company in Europe.