Jul 18, 2022

4 Tenants for Operational Excellence During A Downturn

Don Muir portrait
Don MuirCo-Founder & CEO

What is your Company’s North Star?

This might just be the number one question to answer to build a great business.

Early-stage investments are tightening and there’s a great deal of fear and uncertainty in the market. This is a complete 180 from just six months ago when valuations were rocketing, everyone was writing checks, and sentiment was generally positive.

Unfortunately, this is the environment we’re operating in now. Companies are letting go of talented employees. Fundraising is 10x harder. Just 6 months ago, it was “how fast can you grow.” Today, it’s “what’s your runway”. More importantly, there’s increased scrutiny on making sure that every spent-dollar delivers value.

As a founder, I’m no stranger to this reality. Arc launched in the middle of a global pandemic and I’ve worked closely with my co-founders and investors to figure out how we’ll navigate this challenging macro-environment.

To answer the original question posed above, operational excellence is our north star. We’ve doubled down on the actions and insights that drive our business forward in a sustainable way – without sacrificing our startup DNA. We’re as lean as ever, and we’re focused on the fundamentals that will carry us forward and deliver value to our customers.

During periods of uncertainty, your team needs to align under a common goal. Building resilience is critical to weathering volatility, and having a singular goal everyone can rally-behind helps accomplish just that.

There isn’t a silver bullet for operationalizing success during periods of austerity but I’ve included some key considerations below. While not exhaustive, I hope you’ll glean some insights that’ll help improve the durability of your organization.

Double down on your team

I can’t stress the importance of team enough. Everyone talks about a founder’s resilience during volatile markets—I’d propose expanding the conversation past the founding team.

Your employees are your lifeblood. They keep your organization running and the lights on. They’re in the trenches with you during the troughs (and the peaks), so it’s important to recognize their commitment.

Maintain open lines of communication internally & externally

Transparency is critical in challenging times. Make time to host regular All-Hands, where you recognize the recent wins, and share an honest picture of how the business is doing. Share specifics: burn, runway, and forecasts. Share what is keeping you up at night and share what your plan is to run the business sustainably. Then open it up for questions, and take the time to thoughtfully answer them.

Companies that have taken on outside investments should be up front and transparent with their board and large investors of the current state of affairs. It might feel a bit unsettling to share that you will not hit one of your KPIs, but remember that your investors are also your counsel— they want to see you succeed and may be able to offer advice to help course correct accordingly.

While the traditional role of leadership is to demonstrate strength, in trying times, strength is about sourcing the best help, and being vulnerable is sometimes the best way forward.

Keep morale high

Your team is in this with you. Keeping morale high should be a top priority for startups that are facing hardship. The last thing you want to do is create an environment of fear where your employees start worrying about the future rather than focusing on delivering their best work

Get your team together if they are local, and spend time crystalizing your mission. Show that you care about impact and make time for your team to volunteer locally. Recognize their hard work and reward it with time to blow off some steam as a team. Your goal is to maintain an environment of excitement and camaraderie during this period of uncertainty.

Ultimately your teammates joined because they believed in your mission and company vision. Rally your team towards this mission but as mentioned above, don’t neglect the human elements of the journey.

Think critically about surviving to your next round

If your product doesn’t have traction in the market today, you’re going to have to navigate difficult conversations around a potential pivot, or risk not monetizing the product you’re building.

Think critically about your burn rate and the timing around if/when you’ll raise institutional capital. Make sure your plan gives you enough time to find product market fit and be an attractive company for an equity raise or get to cash flow neutral.

The timing around taking on cash is arguably just as important as your ability to actually raise the capital. Capital injections no doubt extend your runway, but I would caution any founder to really consider if they need to raise funds now or if they can get by with what they currently have on the books.

Cautionary VC behavior is no-doubt driving down valuations for startups. Equity financing is more expensive this year than in the previous decade—founders need to be comfortable accepting dilutive equity dollars for a valuation that may be a fraction of what it was months prior.

We’ve seen what overconsumption and overcapitalization can do—the mantra of ”growth at any cost” has led to inflated valuations that don’t tie back to business fundamentals. While everyone is now scrambling to cut costs and raise capital, I’d argue that you should reconsider your strategy and be sure that this approach makes sense for your business. Then put your blinders on and start executing.

On the one hand, pushing back an equity raise to improve fundamentals increases the risk that your company could run out of capital. On the other hand, rushing into a raise at a disadvantage will reduce the likelihood of you getting favorable terms. I’d argue that delaying a round will force you to more quickly iron out the kinks in your business model and create growth plans with sustainable unit-economics. This will enable you to fundraise from a position of strength in the future and avoid a down round today.

Prioritize sustainability when thinking about growth

Businesses have a range of levers they can pull when they’re looking to gain traction. One of the most popular go-to-market strategies involves a heavy investment in paid advertising, as a shortcut to building brand and product awareness.

While this can be extremely fruitful in the short term, it’s also expensive when you factor in the holistic advertising mix you’re paying to play in. More often than not, companies have paid placements across a host of channels including Google, LinkedIn, and Facebook.

This is especially apparent with companies that have longer sales cycles or long CAC payback periods. If you're chasing enterprise leads, there’s almost always a time gap between when you first invest in paid customer acquisition and when you recognize revenue. While you work through that gap, you’re still spending money. If you add expensive marketing channels to the mix, you’re further compounding the problem.

Focus on slower, more cost-efficient growth channels

VCs are cautioning their portfolio companies to be prudent with spend, but are also holding these companies to stretched revenue and growth targets. So, what can you do when you’re forced to pull back on marketing spend?

One tactic is to invest in channels that cost less and perform just as well but take longer to produce value e.g. content to grow thought leadership in your space and build a halo around your brand. Your audience should be able to see themselves in your writing so be sure to focus on addressing their pain points or put your spin on industry news that is highly relevant to them.

Explore upsell and cross sell opportunities with your existing customer base

It’s 10x more expensive to get a new customer than to keep one.

If you are strapped for cash, one of the easiest ways of growing your top line revenue is offering complementary products or services to your existing customer base—bolstering LTV. The “Land and Expand” model is key to helping companies increase customer LTV and reduce CAC payback periods: you have a captive base of customers you know, who trust you, and are often just a phone call or email away from hearing about your new product.

Raise prices to boost gross profit margins and improve unit economics

There are many ways to improve your gross margins, the most straightforward route is to raise your prices or change your pricing model. A 1% to 3% raise could have a considerable impact on your margins while having a minimal effect on your conversion or churn rate. Of course, staying market competitive is important, and some services are more price elastic than others. The stickier you can make your product, the more palatable a change in price will be.

Some key considerations: don’t alienate your best customers, and don’t increase prices too quickly. Doing it over time and on the right subset of customers is a smart play. Tell them why you made the change, and most will understand and continue their relationship with your business. We all saw our local restaurants do this during the early days of the pandemic, and those that did a good job explaining the decision weathered the change the best.

Be proactive and look for opportunities

We’ve all seen the news surrounding the coming “economic downturn”. There’s a great deal of fear, uncertainty and doubt in the market and companies are playing defense. There’s also opportunity.

What I’d like to instill in other founders right now, is a healthy dose of calculated optimism. Markets operate in cycles – what’s difficult and challenging now isn’t permanent. While it’s always wise to focus on conserving cash, don't shy away from the high conviction bets that you feel will generate tremendous growth for your business.

Philip Hammond said it best: “Sound [public] finances are the essential foundation on which to construct a better-balanced economy from the wreckage of a boom and bust.”

Tying it all together

There’s no denying it – building during a downturn is hard. It requires intense focus, ruthless execution and opportunistic bets. To survive, focus on your north star goals, pursue sustainable growth strategies, and continue to put your people and customers first.