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At the latest virtual Mercury event, our CEO & Co-founder, Immad Akhund, chatted with Kevin Hartz (Co-founder, A* Capital & Eventbrite) and Susan Lyne (Managing Partner, BBG Ventures) about how founders and operators can approach baking resilience into their companies when preparing to navigate a recession.
Both Kevin and Susan know a thing or two about building and leading nimble startups through notoriously dark times. Kevin previously co-founded Xoom, an international remittance platform, in the thick of the dotcom burst, and — against all odds — saw it through an IPO and an eventual acquisition by PayPal. Years later, just ahead of the 2008 recession, he, along with his wife, Julia Hartz, and Renaud Visage, founded Eventbrite, a ticketing platform that was effectively bootstrapped for its first two years and has now sold billions in ticket sales.
Susan famously became Gilt’s first CEO on the day that the Lehman Brothers collapsed. Fresh off the heels of her trailblazing career in editorial and television — during which she greenlighted iconic series like “Grey's Anatomy” — Susan led Gilt to financial success. Under her leadership, the company seized the opportunity to acquire high volumes of designer inventory at bargain prices and fashioned an ingenious “flash sale” strategy to pass the savings along to their customers.
As the next economic slump rears its head, our best play is to learn from lessons past. Having both navigated similarly tumultuous times in the past, Kevin and Susan have cautiously optimistic hopes for today’s startups.
What happens to startups in a recession?
Where there’s a recession, there’s usually uncertainty — and no company is immune to the effects, whether they manifest as dimmer valuations, stalled investment activity, or shifting runway requirements.
That said, a downturn isn’t always doom and gloom — plenty of companies have managed to thrive under conditions where others have faltered, and our speakers are a testament to that. In any case, and for any combination of unknowns, founders and their teams must be ready to adapt their existing strategies when shifts in the macroeconomic climate abound.
In times like these, having a resilient foundation and organization that can readily respond to external impactors can be critical to success, from fundraising and hiring to scaling against the odds.
How to bake resilience into different facets of your business
How do you prepare for the unexpected? For Susan and Kevin, two seasoned operators, today’s economic climate conjures up a familiar feeling. From experience, they know that there isn’t a one-size-fits-all approach, but there are certainly fail-safes that can earn any company a fighting chance. The key is implementing these strategies with a strong foundation.
Here’s a look at some of the ways our speakers recommend baking resilience into different facets of your startup:
Attracting investment and raising capital
It’s natural to feel apprehensive about fundraising when the numbers aren’t ideal, be it within your company or in the macro environment — but the reality is that many companies end up needing to fundraise during uncertain times. Before talking yourself into inertia, think about how you can best position yourself from a strategic perspective.
- Have a strong story that goes beyond financial metrics. As markets turn, founders need to hone in on the story they tell to investors. Since achieving profitability and meeting other hard metrics may not be as quick or as easy to come by, Susan’s take is that securing an investment will depend more on what narrative you can weave from your potential — so prove to your prospective investors that you know what opportunities and challenges lie ahead of you, and that your company is well-positioned to come out stronger on the other side.
- Raise when you are ready, not when the market is. There’s no question that market conditions impact fundraising rounds, and it’s not uncommon for some founders to get cold feet when the climate isn’t ideal. However, Kevin and Susan both agree that if your company has demonstrated sustainable revenue, strong unit economics, and a stable growth path, then sitting idly to wait for friendlier conditions can do more harm than good. Yes, things could always be better, but they can also get worse.
- Don’t be afraid of a down round. A down round — when a company takes a post-money valuation that is lower than its previous raise — is often painted as a last resort. But in a downturn, it can also be a startup’s saving grace. “There’s really only one reason that companies fail,” says Kevin, “and that's that they run out of money.” If your company can’t achieve profitability, then the only way to avoid this worst case scenario is to raise money. Having experienced both sides — first as a founder, then as an investor — Kevin’s take is that a down round can be a way to help your company access the cash it needs without forcing you to stomach a structured round.
Managing cash and operations
When it comes to successfully operating your business through a recession, be realistic about how much cash you need. And if you can, try to build a healthy safety net.
- Adjust runway calculations accordingly. From Kevin’s perspective, knowing exactly how much runway to plan for starts with knowing the answers to more basic questions like whether you have product-market fit or even a product to market. If you’re a seed-stage business that hasn’t launched a product yet, then be more conservative. But if you’ve already found product-market fit and you’re confident you can reach your upcoming fundraising milestones, don’t be afraid to take a more aggressive approach. In a downturn, you’ll certainly want access to a longer runway, but if time goes on and you’re able to cross off notable measures of success, consider siphoning off some of that cash to invest in your future growth. And regardless of how your calculations unfold, make sure you convey your targets to investors.
- Consider funding options like venture debt as a way to extend your runway. Once your company has closed a successful Series B or even Series A round, venture debt may be on the table. For eligible high-growth startups, venture debt can be a powerful runway extension tool that tops off a recently raised equity round with up to 50% more cash. Unlike equity funding, Kevin notes that one of the biggest advantages to leveraging venture debt is that it’s minimally dilutive, meaning founders and operators can buy precious time to grow their valuation while also preserving ownership of what they’ve built.
Building a strong culture
People are the core of your company, so do the work to strengthen your team's psychology and instill a mindset of resilience — that’s how your company will truly stand the test of time. As Susan told us, “The hardest thing about building resilience in times like these is that there really isn't a clear end in sight. So you have to get people comfortable with an unpredictable future.”
- Practice transparent communication. Teams count on their leaders to guide them through the good times and the bad. When faced with the latter, remember that employees also take their emotional cues from whoever is in charge. “If you look stressed . . . they're going to carry that home with them, and they're going to assume the worst,” says Susan. “Whatever challenges the company is facing, your team imagines [something] worse.” For those steering the ship, her advice is to over-communicate: Keep people informed about how things are and where they’re going and lay a foundation of trust. For example, if making cuts is something you’re considering, then be upfront about the possibility rather than denying it, only to backtrack in a few months.
- Hire the right people. From the beginning, make sure you’re recruiting people who are there for the right reasons because they’re the ones who are going to define the culture and stick it out when the going gets rough. Both speakers agreed that resilience isn’t a culture quality you can instill when the going gets tough. To make sure you’re hiring the right people, ask yourself: Do they believe in the company’s vision? Are they invested in helping it build an industry-disrupting product? These are considerations you’ll want to be thinking about well before a recession is even on the horizon. “If people are mission-driven and you know they're there to be a part of something greater, then they will really work towards that,” he says. “If not, [. . .] they can either kind of coast along [until] things fall apart, or they get laid off, or [they] leave and find another job.”
- Create opportunities for wins. Even after you’ve established a culture of trust, it can be difficult to keep your team motivated if the economic outlook seems bleak. To alleviate this, Susan recommends that leaders “find ways to give people wins.” More than ever, companies need to create opportunities for their teams to achieve smaller victories so that they feel accomplished and continue to feel proud of what they’re building.
Where there’s a recession, there’s also hope and silver linings. When so many variables are up in the air, just make sure you have ten toes down. In Kevin’s words: “Iron is forged in fire. It's in the real trying times . . . where you see great teams really perform in a spectacular manner.”
We’ll leave you with another bonus tip from Kevin: “The first thing we tell our seed companies and early-stage companies at A* Capital is to contact Immad and get some extra venture debt from Mercury. No-brainer there — it’s the most non-dilutive debt.” Think you might be on the market for non-dilutive debt? Check out Mercury Venture Debt.