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There is no correct reaction. You only can under react or overreact. And you won’t know which path you’ve chosen until the event is behind you.
We work with founders of every type. We have founders who are technically inclined. We have others who come from finance, marketing, or sales. We have first-time founders and still others who are veteran entrepreneurs. We have startups worth hundreds of millions of dollars and others freshly out of accelerators.
Yet all founders are asking the same questions right now:
Covid-19 is new. Economic shocks are not. For US startups, we experienced a shock when the bubble burst in 2001. We were then rocked again by the financial crisis in 2008. In both cases, we progressed through the stages of grief until a new normal set in.
We’ve enjoyed a decade-long period of growth. A record number of venture capital firms were formed, startups funded, and exits enjoyed.
And not with a slow decline or a lengthy plateau, but rather with a dramatic leap off a cliff… the good times have ended. There will be pain and then recovery and then a slow build of positive sentiment until, ultimately, we will reflect upon this time as the gap between two separate eras of prosperity.
But how do founders bridge that gap?
First, I believe strongly that in the face of a global economic shock, those who overreact will regret it less than those who under-react. And that’s because while there will be government stimulus so massive as to put the bailouts of 2008 to shame, I believe the impact of those dollars won’t reach startups, or at least won’t reach them in time.
Pandemic → People isolate → People stop buying stuff → fear takes hold and stock prices tank → Companies lay people off and freeze hiring to hoard cash → people lose income and buy even less stuff → Governments give out money → Companies hoard the money waiting for people to buy stuff again → stock prices rebound but remain volatile → very slowly companies spend the money → people get jobs again → people spend money again → repeat.
I’m not an economist — not even close. But does that pattern feel off to you? If it feels even reasonably true, what time horizon would you apply to it? The past epidemic-induced economic shocks required 1–2 years for recovery. If that’s true, then an entire cohort of young startups could perish before the economy begins growing again.
We believe some level of structure is required in order to develop an overreaction that’s right for you. Our framework is called R.E.S.T.O.R.E.
First, you must understand the nature of your startup’s relationship to the crisis. Are you susceptible, resistant, or counter-cyclical?
Susceptible means that the crisis hits directly where it hurts you the most. For Covid-19, that’s the travel industry, hospitality, and construction.
Resistant means that the pandemic does not overtly harm your business, nor does it provide a boost. Imagine the early-stage biotechnology company running clinical trials. It’s a science experiment with a binary outcome. Covid-19 does not matter.
Then there is the rare counter-cyclical business that will grow while the economy shrinks. Streaming services, remote collaboration tools, and video gaming are all thriving while humans stay distant and at home.
What would you do now if you knew that business wouldn’t return to normal for one month? 3 months? 6 months? Throw out your current financial plan and imagine various scenarios — from modest disruption to severe.
Given your revenue forecasts, what expense can you eliminate? You might be able to lay off personnel, furlough others, trade equity for cash, shift to contractors, terminate lease agreements, and suspend projects to ensure your business has the capital to outlast the worst of the shock and be ready for when the market rebounds.
But before you execute the cuts, make sure to test your assumptions and expose your blind spots. For each anticipated saving, ask yourself why such a shift might be a poor choice. What pain (direct and indirect) might the termination, suspension, or elimination cause? Might you accidentally hinder support for a critical customer or endanger the stability of the product? Might you irrevocably damage your culture or lose too much institutional knowledge?
You’ve figured out your defense; now it’s time to play offense. Even in the darkest times, opportunities exist to create value for your customers. What might you do to help your customers or partners who also are suffering? Is there a new product you might release, a discount to extend, or content to share?
If you’ve developed a revenue forecast, agreed on expense reduction, and detailed opportunities, it’s time to complete a revised financial plan.
It’s time to go to work. Define success, assign owners, and develop action plans. War time rules apply.
For weeks now, I’ve felt like I’ve been living in a dramatic film. It’s a movie where all of the characters know something awful is imminent. No one is quite sure when the boogieman will arrive, but we’re all in agreement that it’s close, and it will be terrible. Our startup founders feel similarly. It’s invisible and ruthless. The fear that sales will shrink and funding will vanish is enough to drive even the most balanced CEO to madness. If that sounds extreme, good. Please overreact. You’ll thank me later.