Today looks like a bit of a blood bath on the markets, so I figured it is as good a day as any to talk about what an economic downturns feels like for startups. I was “fortunate” enough to launch a company the day Lehman collapsed in 2008 (Sept 15th!!), and got to see the first hand impact of the downturn. We also were raising a B round during that time.
Most media seems to paint the picture of this post-apocalyptic world where suddenly all funding disappears and everybody wakes up and the tide has gone out and everybody is naked. I disagree. To me, the downturn felt more like death by 1000 paper cuts, such as:
- Your churn will climb. Partly because of non-payment, failed credit cards, canceled credit cards, etc. If you do churn reports, “cutting back” and “not feeling the value” will increase as reasons.
- Suppliers/Partners will stop paying you in a timely way, some never. Your average AR period will start to run at first slightly longer, then much longer. You’ll probably need to hire a baseball bat.
- If you have physical product, distributors/channel will send back inventory because they are getting rid of any “risky” inventory and focusing on basics, i.e. products & goods that move easily like toilet paper and milk.
- Conversion rates will start declining for every marketing trick you try (except lowering price). And with that, cost of acquiring customers goes up. You’ll also probably just invest more into marketing as an initial reaction to declining customer counts.
- Your ISP (or any low margin, commodity supplier you use) gets “acquired” by 3 different entities in 12 months and start having annoyingly regular outages.
- Angel investors, or anybody holding debt, turn into vicious debt collectors. As terms reach they demand outrageous interest. Now you are paying 2 employees worth of interest per month.
- You are forced to lower price, at first by small amounts, and then gradually more.
So if you increase churn by 2%, increase acquisition costs by 10%, chop price/revenue by 10%, do you know what you have???
- A Broken Business Model that is Not Fundable.
More good news, VCs and angels get caught in this churn. Exits disappear (2008 VC backed M&A was down 54% from 2007!!!) and with it RoI. Many “busted business models” appear in the portfolio, and soon they have to get written off. It gets nasty. VCs who are dying stop feeling like the Fred Wilson-ian brothers-in-arms company builders, and they start to feel more like debt collection agents. SELL YOUR COMPANY! MERGE WITH THIS CRAP COMPANY! LETS PARACHUTE IN A NEW GOLDEN CEO! PAYCUTS! WHY ARE YOU GUYS GETTING PAID?
The Good News
Here’s the first good news. Only two things on the planet can force you to die: 1. YOU – You Give Up & 2. Debt Gets Called.
The second piece of good news. Some businesses do great at managing downturns. Why? Execution and a little luck. You can track all the little death by a 1000 paper cut stuff I listed above, see that the world is changing and manage it. If people stop paying you or start delaying on payments, you gotta get out there and do some hard nose collecting. If churn starts to rise because of credit card defaults, try to bill in new ways – use different billing dates, bill in multiple smaller chunks, etc. If you have to lower price, get a new product out or a range of products so you can defend average price. If you see it coming and are fast enough, you can react and your company can survive.
The third piece of good news. All of this starts happening before big market moving catastrophes happen. Bad “paper cuts” were happening months/weeks before Lehman collapsed. In the summer of 2008 other startups I knew were having churn & credit card payment issues.
There are a lot of folks who survived 2008/2009 and built profitable businesses around Canada. Would love to hear some of your thoughts.