Belt-Tightening Tips for Start-ups (Part II of II)

Belt-tightening tips must eventually be accompanied by a growth footing

In my last post, I offered five fairly straightforward tips for young companies to help weather the current market downturn. Because all lists must somehow number to ten, let me add five more. As in the first installment, some are pretty obvious and intuitive; others less so. Of course, executing perfectly on all ten suggestions is no insulation from failure. That said, incorporating even a couple into a company’s modus operandi can affect a variety of other changes in the company’s DNA that, at a macro level, can profoundly impact whether a struggling company can navigate these troubles waters and emerge on the other side a stronger, even dominant market player, or whether they will be tossed upon the rocks. With that in mind…

6. Reach out to Stakeholders.Human nature being what it is, when many of us encounter challenging times in our careers, in our businesses, or in our personal lives, we have a tendency to hunker down, put up walls, and isolate ourselves. This probably worked fine in our youth when the proper approach to preparing for a final exam or for drafting a term paper was to cloister ourselves in our bedrooms, free from temptations and distractions, and focus on the task at hand. As adults, however, this tendency can be disastrous. A time of crisis often demands that we reach out to others for advice, for networking, for sharing ideas, and even for aid and comfort. For stakeholders — be they investors, employees, or advisors –, there is nothing more troubling than company management being less than forthcoming about the organization’s financial and operating condition during a crisis. In the absence of clear and regular communication between CEOs and stakeholders, little things can get blown out of proportion or misinterpreted. The notion some CEOs have that approaching investors for guidance or when one is troubled is somehow a sign of weakness is nonsense. Now is the time to re-examine how you’ve been communicating to stakeholders and to make changes if there have been issues in the past.  The only thing worse than delivering bad news to a board of directors is delivering that news late when the issue is a fait accompli and the board is blindsided and can no longer really help correct the problem.

7. Re-open your old agreements. Did you sign a $6/sq ft lease last year when the market was frothy, but now the market rate for equivalent space is probably closer to $4? Call for a meeting with your landlord or commercial real estate broker and push for a rent reduction. Are they required to work with you on a new lease rate? Of course not, but they are business people and they’ll probably realize that it’s usually a lot cheaper to lower the rental rate than have a tenant break their lease or go out of business and have the space sit vacant for months on end. Do the same with any contractors or consultants where you think the softening economy might give you leverage for better terms.

8. Horde your cash; Use equity whenever possible. If you haven’t already done so, ask if your law firm will defer fees in part or in whole during this down cycle. If they won’t, consider changing your legal counsel – it could be that important! Do the same with any partnership or other service provider agreements you might have – PR firms, ad agencies, etc. Money is a proxy for time; the more cash you can avoid paying out, the more months you add to your company’s lifeline, and the longer your company will have to see its plans come to fruition and for you to turn things around. Now is the time to horde cash and pay out equity to any vendors or partners that are willing to accept it. Such arrangements also have the added benefit of aligning incentives all around. Everyone will have direct skin in the game in your company’s success. That gets people motivated in a way a cash-based fee arrangement never does.

9. Don’t Shoot your Golden Geese. In a downturn, the tendency is to give everything a budgetary haircut. Unfortunately, this can be done indiscriminately and can result in key functions critical to sales and revenue (your company’s lifeblood) being hobbled. Look closely at what directly interfaces with customers and partners and make sure those things remain as intact and high-quality as possible while you cut just about everything else. It’s much better to trade your high-end office furniture for used Salvation Army desks if it means your team can still afford to appear at that key trade show. Customers will almost never see your office. It is far better to move to a smaller space in a less desirable part of town if it means it will free up enough capital to keep on two rainmakers that are getting you intros to key partners. The right alliances could make or break your company. The talented BD or Corp Dev person that can bring you those relationships can be worth his or her weight in gold.

10. Pick your metrics, pick your plan, and stick with it.As the cliche goes, without a roadmap, will you know how to get where you’re going, or even that you are there when you arrive? If you’re doing things properly in concert with these ten tips, you have already assembled the key managers and stakeholders in your company and have actively engaged them in helping develop a strategy for how to manage through the current cycle. Now what is left is deciding what key metrics to focus on in order to determine whether your strategy is succeeding. Each industry has different indicators; find out what yours are – is it traffic? unique visitors? click-throughs? sales? RFPs? Whatever the key metrics are, define them in such a way that you can measure in real-time how things are tracking so adjustments can be made on the fly if things are under-performing. Also, once a plan is developed, make sure it has time to succeed, Don’t be one of those companies we all read about that’s on their fourth turnaround plan in as many months (and sometimes their fourth CEO also.) While it’s a serious mistake to hold on to a strategy that is not working, embarking on new plans too quickly can be just as damaging to morale, stability and credibility with investors.

Belt-Tightening Tips for Start-ups. (Part I)

5 Ways Start-Ups Can Weather The Storm

While it’s been several weeks since a handful of renown venture firms issued dire warnings about the state of technology markets and urged portfolio companies to buckle in for the coming turbulence, many start-up management teams have approached me at conferences and in airport lounges seeming unclear on how best to proceed. While every investor, it seems, has an opinion on what we can expect over the coming months, a far fewer number has followed up with concrete things start-ups can do to improve their bottom-lines and–by extension–their fortunes. Granted, it’s difficult to issue broad pronouncements on belt-tightening strategies for emerging growth companies given the diverse nature of these companies and their wildly differing cost structures. That said, there are some common sense principles and direct actions that start-up teams can take now that apply across market sectors and industries and can have lasting impact.

1. Get Your Hands Dirty.When the proverbial poop hits the air conditioner, some feel it is best to bring in professional turnaround consultants or crisis managers to grab a mop and begin the process of layoffs and other sundry unpleasantness that must accompany the right-sizing of a young company. For the most part, I say that’s overkill and sometimes counterproductive. In my decade or so around emerging growth companies, I can only think of two or three occasions when the circumstances around a company in distress absolutely required the services of an outside consultant. In contrast, I can summon many more occasions when the presence of such a consultant was detrimental to the company–other times, unnecessary, at best.  

There is a strong case to be made for start-up CEOs being directly involved with most, if not all, of the painful and unpleasant tasks associated with dramatically reducing cost structures in a downturn. Getting outside advice is invaluable, but executing on that advice should be done by the management team itself. Don’t outsource the dirty stuff. There is nothing more distasteful for an employee that’s given his or her blood, sweat and tears to a new company than getting laid off from said company by some junior flack in human resources or, worse yet, a faceless consultant who will likely pitch tent at another drowning company a week from now. If there are doubts about this, ask anyone who has ever been fired or laid off. It’s an excruciating and cathartic event–even if the employee had sensed it was coming. Having the CEO or, at least, the employee’s direct supervisor break the news to the subordinate provides an opportunity for the newly laid off employee to vent some of his or her issues and frustrations and provides for closure. It also has the effect of preserving the relationship with the employee in the event there is an opportunity to rehire the individual later on when things improve, and it can improve morale among those employees who get to keep their jobs. Witnessing their boss actively engaged in the painful process of layoffs often makes employees respect that boss more than learning that the process was outsourced so the boss could personally avoid the fallout. Getting blood on one’s hands and getting through to the other side of that process is a leadership moment for all managers. Don’t delegate it away.

2. Act with All Deliberate Speed. Whatever your company’s circumstances, make a plan quickly and begin acting on that plan. If a capital raise is being contemplated, get to market as quickly as you can.  Capital markets can soften almost daily and time lost can never be recovered. If staff cuts are needed, cut quickly and deeply. Don’t drag it out (see point #3). Your company and staff will need time to recover and move forward.

3. Cut Deeper Than You Think. As counter-intuitive as it may sound, it is often easier to re-hire laid off workers if and when things rebound than trying to keep on idle resources. Moreover, making lots of little staff cuts is a company killer. It wrecks morale. Employees are constantly looking over their shoulder at when the next round of layoffs is coming and can lose sight of the broader objective. An “every man for himself” energy begins to pervade the culture and, when that happens, the company is usually toast. To borrow a sloppy metaphor from the recent presidential campaign, it’s the ax versus the scalpel. In this case, the ax wins hands down. Ideally, you should get out the ax once, cut hard and deep, give the company time to recover from the surgery, and get back to rebuilding the organization.

4. Sweat Every Expense. Yes, I know you’re already doing that anyway; but, this time, insist that every expenditure be directly linked to revenue in some way, however indirectly. Defer everything you can that is not directly revenue producing. No high-end furniture upgrades. No office expansions unless you are literally on top on one another (and even then…). No technology upgrades unless the old laptops/servers are directly impacting performance and, hence, revenue.  Also– and this should go without saying — dump all the expenses that you took on when things were crazed and you convinced yourself you did not have time to handle them. An example?  Fire the guy that comes every other day and waters the office plants. Do it yourself.

5. Back to Basics. As I’ve discussed in prior posts, entrepreneurs have a tendency to want to boil the ocean, particularly in frothy markets. This is not altogether a bad thing: it can emphasize all the leverageable opportunities for the company and its concept down the road. The key here, however, is down the road. Not now. As such, in a tight market, the company much focus first and foremost on its core business. What is it known for? What do customers immediately associate the company with? What is the company’s key value proposition? Everything else must be tabled.

When I think of companies that recovered from significant past market corrections and deep layoffs to become market leaders in their defined arenas, almost all of them persevered because they did one thing above all else: they focused entirely upon delivering massive value to a core group of customers (even just a handful of customers) and eschewed all other distractions. Their ideas were usually the simplest ones, but these companies stayed on target with their core business proposition and were the beneficiaries when the market pulled out of recession and there was a healthy spike in IT spending and other expenditures as pent-up demand from all the belt-tightening got released back into the system.

Part II (tips 6-10) coming soon…