Operating in an Economic Downturn

If you have 18-24 months of cash, you don't have to change much about how you're operating. Continue with the normal operational fundamentals and focus on unit economics, and you're in a good spot. Still, it's good to think about fixed costs and how you can reduce that or turn them into variables. Should you hire employees for a particular function, or should you outsource to a firm? Do scenario planning now in case your assumptions for incoming cash flow through customer revenue slow or stall, increasing your burn rate. You want to be in a place to take action quickly, not sit around and think through the problem at that time.

When you're cash-burning and only have six to twelve months of runway, you need to find ways to reduce costs, cease hiring, and raise cash now. If you have less than six months of funds, you're in a bad spot and need to start an emergency fundraiser to keep the lights on. Look first to your existing investors for a bridge.

Find the Cash

Completing a funding round takes time. Depending on your situation, you might need to begin ASAP. Just because the economy is struggling doesn't mean you can't raise capital. Keep your prices reasonable by doing your homework on valuation multiples, or investors will take their money elsewhere. Better to take a blow to your ego over price point than to sunset the company.

Be sure to check in with your current investors. Many tend to buzz in the CEO's ear -- use that access to request a bridge round and leverage that capital to keep the business afloat. Don't be shy, or you may not last long enough to ask them later. Every investor holds reserves for follow-on investments. You might not have their full support in the next round, but if you don't take their cash, there might not be another round.

You can also seek out new investors, but you must demonstrate that your operating model is efficient and won't evaporate cash. Do your homework and understand what they've invested in and what they like. It's always easier to upsell current investors than track down new ones.

If fundraising efforts fail, it's time to think about trying to find a buyer. While it may not be your desired outcome, your company may not survive without it. Work with investment banks and tap M&A advisory groups to put things into motion; it takes as much time to raise capital as it does to find a buyer. That buyer could be the difference between flying and folding.

Leverage Your Leadership Team

Navigating choppy waters requires knowing how to present yourself internally and externally. Planning for the storm ahead should begin with a conversation with your CFO and executive team about the stakes. Once you're on the same page, work together to create three to five scenarios for moving through the downturn and how long you can last in each.

Now that you've built a roadmap, call a board of directors meeting and recommend what course of action you think is best. CEOs often make the fatal mistake of failing to lead their board. VCs often sit on the boards of up to a dozen companies and may not remember all the details of your particular company. You need to re-affirm their confidence in you as much as in the plan.

Demonstrate Leadership

With a roadmap in place, you must communicate the plan to your employees. While ensuring your business is financially stable enough to weather the storm is priority number one, you can't neglect the human side. A down economy will impact morale, especially if you resort to layoffs or budget cuts. And no one will forget that you treat people well when you have to make them leave. 

Rely on managers to connect one on one with their reports to hear their concerns, but don't be afraid to speak directly to individuals. Get on video or zoom, pour your heart out, and show that you care about them. And for the folks you're letting go, give them a nice exit package so they can keep paying their bills and open your network to help them land a new job. 

Too often, CEOs make the fatal mistake of forgoing honesty and transparency to avoid conflict. People will tell you about their nerves and unhappiness, and you should listen and respond in kind. It's okay for your team to be sad and for you to share their emotions. Don't forget that your company is filled with people who love working there. Most likely, your employees had bet on you when times were good, and they can bet on you again in a downturn. 

Microsoft was formed during a 16-month recession. Mailchimp started after the dot-com bubble burst. Many great companies have weathered down markets and emerged stronger. You'll need to adjust your timelines, and be nimble, creative, and cost-efficient. If you stay afloat long enough, you'll emerge better than ever.