Updated: Jul 13, 2020
Suddenly it’s tough out there. Building a technology company is always hard work but it just got a whole lot harder. For many of you, difficult decisions will need to be made to save your company.
Advice on what to do depends on your market, the competitive environment and whether you have cash. COVID-19 and the resulting recession could be an existential threat to your company, or it could be opportunity your company needs to stretch ahead of the competition.
If you have no or little cash, you are in an existential fight for your company’s life. Extending your company’s runway is all that matters.
Smashed by September 11
Way back in 2001, Aconex was just getting going. We launched our product in April – an internet-based collaboration platform for managing construction projects – a SaaS platform before the term existed. We had won some early customers and had good initial traction. With 17 people on the payroll, we lined up to do our second seed round; working long hours supporting customers and simultaneously pulling together our information memorandum for the fundraising.
A couple of days after the Information Memorandum was completed, and just as we were sending it out to potential investors, planes struck the Twin Towers in Manhattan. I remember exactly where I was the morning it happened – I had taken a plane to Sydney to visit a large property developer and was in their offices as news of the attack broke.
Unfortunately for Aconex, with the global fear and uncertainty, potential investors’ hands went straight back into their pockets. There was no way we were raising capital anytime soon, and with only 6 months’ runway, we were in big trouble.
To save the company, we had no choice but to look for immediate cost savings. We dropped all staff to 4 days a week to reduce costs by 20%. As founders, of course Rob and I continued to work full-time but on this reduced salary.
As the weeks went by, while existing customers remained loyal, we had very little new business. We tried to raise some money, without success. Aconex was nearing death.
By January 2002, it was looking even worse. With no additional capital, our financial controller came to us one day and told us we couldn’t afford to keep him, let alone the rest of the management team. To extend our runway, we re-worked our plan and resolved to reduce head count from 17 to 12, laying off our entire management layer. It was back to Rob and me, and a bunch of developers.
We struggled on, somehow, and by April 2002, the prospects for the company were improving. Existing customers liked the system and, as projects started to kick off again, we won some new customers. Thankfully a few new investors in addition to existing investors (through a rights issue), supported a capital raising at the same share price as our seed round.
Nearly all of Aconex’s early competitors had been wiped out by the dot-com crash, and of those that were left, most were then taken out by September 11. We were lucky to survive and now had the market almost entirely to ourselves. Coming through these difficult economic times, we were in good shape and our growth took off.
Looking back, we made some tough decisions, but could have moved faster and cut back even harder initially. By reducing costs, working hard and going the extra mile for our customers we made it through, just.
Cash is everything
The old cliché that “cash is king” is never truer than in a crisis. So firstly, you need a detailed, monthly cash flow forecast. Quarterly won’t cut it - it still amazes me how many startups and scaleups don’t plan monthly. When cash is tight you must ensure that you can get through each month.
Cut hard and cut fast
Every week matters. Don’t delay and wait to see if things will get better – they won’t get better fast enough for your company. The world will eventually get through the COVID-19 crisis, but it won’t be fast enough for you if you are cash-strapped.
You must cut hard and fast - and cut once. It is much better for remaining staff morale to know that the cut has been done and nothing further is planned. Always tell the truth about the company’s position and be transparent with your team (I’ll talk more about communications in a post next week).
What do you cut? Clearly at the top of the list is discretionary spending and your core long-term staff are at the bottom. As a principle, ensure that there is shared sacrifice across all staff at the company, with founders and management leading by example. Work down the list to the point where, with a conservative revenue forecast, you can survive. Your runway needs to get you well past 12 months or it will be almost impossible to survive without a heroic capital raise and/or sales effort.
So, starting from the top:
Eliminate all discretionary spending – travel (already done by COVID-19), events, anything new (furniture, laptops, etc – make do with what you have).
Freeze all new hiring and push out start dates (if possible).
Put all pay-rises and bonuses on hold.
Terminate all contractor roles (unless part of core staff).
Stop all external projects – consulting, new IT systems, branding reviews, etc.
Lay off non-essential staff. Some founders will think that all staff are essential (“we only hire great people”, “we don’t have any fat”) but the reality is that if you are growing fast you have hired some B players.
Cut salaries across the board – at least 20% - some companies go even harder dropping salaries by 30%. Hours could be reduced in line with this for your team. As founders and management, you should lead by example – keep working full-time and consider taking a deeper salary cut. Staff salary cuts can be offset with equity top-ups and bonuses (when the company makes it through).
Furlough non-essential staff where they take leave without pay and remain on the books. This keeps staff connected with your company until the economy rebounds, and in the current COVID-19 crisis, this may dovetail with government assistance (e.g. Jobkeeper in Australia).
Cut core staff back to only absolutely mission-critical staff. This can be gut-wrenchingly hard, but it is better than closing the company in three months’ time.
Sometimes I hear managers say that they are asking staff to take paid leave or sabbaticals. It will improve your P&L but it will not help your cash position. Unless the leave is unpaid it will not save you money.
When you are short on cash, there’s limited scenario planning you need to do. Assume the worst then cut hard and fast to extend your runway. You may just have a chance at selling / fundraising your way out of trouble as the economy rebounds.
Cows on the commons
A final thought on economic downturns… Unfortunately, none of this advice is good for the overall economy. It is a classic “cows on the commons” problem - what is optimal for each company is not optimal for the overall economy. Every company trims or cuts, people lose their jobs and the negative economic dominoes knock on through the rest of the economy.
However, as an entrepreneur that is not your concern. You have one job right now – to do all you can for your staff and for your company so that you can live to fight another day. Extend your runway, buy some time… then hope you can survive and start growing again later.