I spent an excellent two days in LA this past week at The Upfront Summit. Mark Suster and his partners did a great job putting together a strong group of speakers and attendees.
During a panel conversation, I mentioned a significant priority for founders and CEOs of startups is to manage momentum – across facets such as financial performance and business metrics, raising larger financings at increasing prices, recruiting stronger, more experienced employees and retaining them, closing larger and more notable customers, earning more positive press coverage, etc. Afterwards, Semil Shah and I concluded that while momentum tends to build slowly, it can be lost very quickly, similar to trust. To acquire and hold momentum, founders need to deliver “up and to the right” results across the many dimensions mentioned above. Unfortunately, by skipping steps, however tantalizing its been of late to overstretch on valuation, raise more capital than advisable, over-invest to pump metrics pre-maturely, leaving too little time to build the underlying infrastructure to support rapid growth, many founders have left themselves vulnerable to a backwards slide in momentum, especially if the venture capital market slow down continues.
So what’s the implication of this?
At the conference I heard a bunch of people talk about the need to cut burn rates. Obviously, companies should never waste money. But, its VERY rare to see a company turn it around and create a huge outcome once it finds itself in a position where it must drastically cut burn to extend runway. Particularly for founders who’ve raised high priced, large financing rounds on the premise of rapid, yet expensive growth, in a down market, these folks are faced with a Gordian knot that will be very challenging to untangle. On the other hand, for founders of high growth, highly valued startups who’ve smartly raised plenty of cash, I’d argue that NOW is the time to accelerate smartly. While the competition cuts burn to prolong runway, the strongest companies have a chance to gain ground, becoming the dominant player in their respective spaces. Of course, the same rules apply to all companies – its never advisable to waste money. But, time tested tactics to pull away from the pack include:
- Hire away the strongest execs at your competition. Startups are collections of people and experienced, talented execs can really help move the needle. Hiring away great execs from the competition has the double benefit of helping, while making life tougher for the competition. Being careful to respect labor laws and IP is, of course, advisable.
- Invest in product initiatives that accentuate differentiation. For both consumer and enterprise companies, product quality is more essential than ever. Doubling down on product investment can help accelerate the distance from slower moving competitors who are husbanding cash.
- Focus on your competitors’ customers. Gaining relative market share is a huge opportunity when competition slows down. Taking rivals’ top competitors is a double bonus – a zero sum game when looking at market share. In tech, market share leadership almost always equates to non-linear valuation gains as well. Its not rare for a company with 50% market share to have 90% of the value in a market, for example, so the spoils of market share gains can be tremendous.
- Acquire attractive assets cheaply. Acquiring rivals when they’re less expensive can be a great way to accelerate progress and emerge even stronger when the market recovers. Of course, taking care not to bring on too much overhead, burn or drama is key in acquisitions.
If the market continues to slide, I believe we’ll hear about more promises to “cut burn.” One can find countless examples of venture backed companies who’ve cut burn into obscurity, while looking back at the trajectories of companies like Workday, LinkedIn and ServiceNow during the ‘08/’09 global financial crisis however, they all raised capital early enough to invest aggressively during the downturn, coming out the other side with tremendous momentum and strong market positions. Taking lessons from these great companies makes a lot of sense to me.