How startups should handle the downturn
The 2022 crisis is the third major tech downturn of the internet era, following the dot-com bubble and the Great Recession.
Many experts are dispensing advice to founders on how to weather this storm. While this advice is broadly helpful, we must consider that it’s been approximately 14 years since the last major correction, and few in our industry have actively gone through a full economic cycle. Therefore, it is important to remember that good advice is tailored, specific and, more importantly, contextual.
Each company is unique and faces diverse circumstances. Does a downturn affect every company identically? No. Do some companies have more favorable balance sheets than others? Yes. Are some companies able to raise funds even in difficult circumstances? Absolutely.
The best advice for handling the downturn should be based on the length of your runway and the efficiency of your business. Runway falls into one of three categories:
- Two years or more;
- Between one and two years;
- A year or less.
The corresponding strategy for each would be, respectively, “stay aggressive,” “ruthlessly prioritize,” and “time to trim.”
Editor’s Note: TechCrunch+ has notes from an interview with the author of this letter, Mike Volpi — including the potentially good news it contains for many startups — coming shortly. The following letter was lightly edited and reformatted for our pages.
Great companies are born in difficult times
Great businesses have been built and have flourished through some of the most difficult times. Famously, Google raised capital in the aftermath of the dot-com bubble, grew through the downturn, and was able to distance itself from the competition. Salesforce, founded shortly before the 2001 crisis, survived the storm effectively, even though it almost went out of business in its early days. Most recently, Uber enjoyed a similar rise during the Great Recession.
Turbulence does require a different skill set from founders. Gone are the days of “grow at all costs.” Today’s environment requires subtle and precise control and management of the business. When navigated carefully, these periods can separate the wheat from the chaff.
The first step in navigating through stormy waters is to make a cold, hard assessment of your business:
- How much cash runway do you have?
- Do you have the proverbial product-market fit?
- Is your growth strategy cash-efficient?
- Have you evaluated and prioritized your engineering projects and marketing programs?
- What is your competition doing?
