Our thoughts on handling current market conditions and emerging stronger than before

Originally published on our website in March 2020

This week I sent a memo to the leaders of our investment portfolio companies at N49P, with advice on how to handle this period of uncertainty. Here it is in its entirety.

Dear founders,

I hope you are all healthy and holding up well during these stressful times.

Here are our thoughts on the current environment and what it means for you and your business. In difficult and fast changing times, it is important to act rapidly but not hastily.

Venture backed start-ups are facing two challenging market changes:

  1. Relatively difficult fundraising market. Ever since WeWork publicly blew up six months ago, the fundraising market has been changing and becoming relatively difficult compared to the previous year. “Great” startups with strong teams, margins, and traction continue to raise money at lofty valuations and with relative ease but life has been significantly harder for other companies. “Good” startups in favourable market segments and strong gross margins are closing rounds but it is taking longer than before. All others are having a difficult time raising funds.

  2. Market turmoil due the COVID pandemic. Governments are taking (justified and) unprecedented actions to slow the spread of COVID. The financial markets are now highly volatile and the size of the economic downturn is not clear. What is clear is that there will be a recession but it is hard to predict the length of the size of this impact. Early indications are that consumer businesses will be hit hard and fast. Eventually this will impact B2Bs as well.

There are three steps you should take now: (1) Get yourself ready for a prolonged slog, (2) update your strategy, and (3) take advantage of unexpected opportunities.

  1. Get yourself ready for a prolonged slog. Before you lead yourself or your team, you must make sure you are physically and mentally ready to deal with uncertainty for a prolonged period. This means taking a step back and making sure you have habits that allow you to sleep well, eat well, work out, and have time to think. You should also make sure you are financially comfortable; if you are struggling to pay rent or eat you will not be in the right frame of mind.

    Every person should find their own routine. I did a reset when I was running HomeSav. We were going through a particularly stressful time and I was constantly drained. My life and ability to lead the team drastically improved when I started to make time for a daily run. The forty minutes per day refreshed me and cleared my mind. This enabled me to better prioritize issues and bring more energy to work.

  2. Update your strategy. Many of your underlying assumptions and goals most likely reflect a reality that is now out of date. You need to review them and come up with new assumptions and goals that prioritize cash flow to pay for a team that allows you to survive.

    Cutting costs is the most common tactic. Many blogs, podcasts and articles cover this already. What many startups forget to do is to look for new sources of cash. I have seen startups apply the following tactics to “find” additional cash:

    i. Slow growth to increase revenue. Typically, growth is more valuable than immediate revenue. In uncertain times revenue becomes more valuable. Many startups have made unrealized trade-offs to increase revenue. It is time to review those assumptions. Try raising prices and changing pricing models. Shorten trial periods, provide less for free, reduce referral bonuses, charge implementation fees. You will be surprised where you can find valuable extra revenue now at the cost of future growth.

    Here’s an example from Brad Gessler of Poll Everywhere from the last downturn: “The way we funded our work was by keeping an internal product backlog and putting a phone number on our website. If a customer called wanting something aligned with our backlog, we'd give them a quote, collect their money, and build it for them.”

    ii. Incentivize your customers to pay you faster. Offer larger discounts for bulk or annual purchases.

    iii. Re-segment your users and see how their needs have changed with the environment. Surprisingly some of your customer segments may have a more urgent need and desire to pay for your service. If this is the case take advantage of it. We have already seen a couple of our portfolio companies apply this strategy with great success.

    For example, Wondeur enables insurance companies to provide more accurate and faster quotes on art portfolios. These insurance companies usually acquire customers via events and conferences. With all conferences and events cancelled they now need a reason to reach out to potential clients. Wondeur’s software provides a reason to talk to potential clients. In the last two weeks alone three clients have called to expedite the roll out of their software.

  3. Take advantage of unexpected opportunities. No one knows when the environment will stabilize and what the new norm will be like. During this period of transition there will be unexpected and non-obvious opportunities. Competitors will go bankrupt, new consumer and business habits will be formed and other unforeseen opportunities will arise. Startups that take advantage of unexpected opportunities can build world class companies.

    How do you build one of these companies? Become more perceptive to how things are changing and quickly take advantage of changes that can have a transformative impact on your business. Most of these will not be part of your current plans but the upside will be worth the deviations to your plans.

    I experienced this at Xbridge in the 2001 to 2003 period. We took advantage of market turmoil to transform our business and set us on a path to a £400m exit. Some of the “opportunistic” actions included:

    • Acquiring the assets of better financed companies that were having difficulties including Work24 (a Scottish Power/Bank of Scotland startup) and Finexia.

    • Ramping up spend on SEM by 20x to take advantage of the limited budget that the incumbents had. This exhausted their online budget and lowered our CAC

    • Changing from a customer acquisition channel for some partners to a vertically integrating offering. Insurance companies had pressure to go direct but didn’t know how to close leads we provided. We developed an offering where we managed their contact centers for all leads. This further deepened our relationship and led to favourable financing from them when financing was difficult to raise.

I hope this email makes you pause and think about what to do next.

To help the entire tech community, on Monday, March 23, TechTO will host “TechTO Together” — a free online event where you can learn from leaders who have worked through challenging environments. We’ve asked some friends — tech leaders like Andrew D'Souza, Candice Faktor, Chris Rasmussen, Valerie Fox, Jamie McDonald, Mike Katchen, and many more — to share their insights and guidance about how to navigate tough times.

I am here to support all of you and will follow up with each of you individually soon. Finally, in the immortalized words of the British government heading into World War II: "Keep calm and carry on."

Kind regards,