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Anticipating that a financial crisis like the one we’re currently experiencing wasn’t far away, I’ve run my company, richrelevance, on a zero-fat budget, raising small rounds of capital to ensure our team built the discipline to operate with small budgets. Yet, anticipation of the downturn does not make me immune to the shift. External risks in every business have changed. None of us will go through the next 18 months without significant impact.
But many entrepreneurs who saw the now-famous “Sequoia deck” unfortunately took its conclusions to be a tenet of truth and acted on it — perhaps too hastily. The folks at Sequoia are smart, but they aren’t necessarily smarter than you or me at running our businesses. This is the crux of the issue: While this market shift is, in fact, a 5- or 6-sigma event, what we do with that information is still within our domain.
Reacting blindly to a situation is wrong — being reactive is bad for your business. There’s a process to responding to urgent situations, much like triage in a hospital, and by understanding, analyzing, acting and repeating we can surmount these challenges. Now is a unique time when you can deepen customer relationships by advising them, seeking input, sharing ideas, etc. Below are four steps to responding the current economic situation without being reactive.
1. Identify and Understand
Acting on bad information is worse than not acting at all. My gut reaction to this shift was, “I’m sure glad we build enterprise software and that I’m not a social network,” but this thought is wrong and fraught with (incorrect) assumptions. While not all social networks will survive, their inherent value has not disappeared. And, while the innate value of the applications we’re building has not deteriorated, the amount (and way) we are paid for these services may change.
To protect our businesses, we need to keep a close eye on market dynamics. Talk to customers, partners, and vendors. Find out what they’re thinking and seek their input — this is a unique time to establish new dialogues and chart the course for deeper, more beneficial relationships.
Read. Gather data. Then, go sleep on it.
2. Analyze Risks
The biggest assumption from the Sequoia presentation is that the downturn is so large that it will affect us all equally and uniformly. This is patently false. As entrepreneurs, we believe the opportunity in our market is so great that it outweighs the risk. Sit at a whiteboard with your management team and consider the new risks in the equation. Break these down into two groups: risks I can control (internal) and risks I can’t control (externalities). Much like a triage leader, identify the severity and urgency of each risk in how it affects the bottom line, how much capital you have on hand and how much you can absorb long term. The key is to be honest with yourself.
First, stop any bleeding. If your burn rate outpaces revenue, cut — dramatically. If you have contracts that put you underwater, address those. Next, address internal risks. For example, if you finish X product line you may increase revenue with existing customers. Yet if X product requires long-term R&D and there’s not enough cash to get you there, put the project on the chopping block. Finally, proactively shore your business up against externalities — i.e., “What happens if my customers don’t pay on time?” Keep in mind: The stakes are higher than ever. Use your advantage as a startup to do more things better and faster than the competition.
4. Close The Loop
You’re not done. Iterate. Constantly communicate with your team about how you’re executing against goals. Stay engaged with customers. Re-engage the whiteboard regularly.
None of these principles are new. This is how we should be running business regardless of the economy. The climate may have changed, but the rules of good business are still the same. Failure is still not an option. Freaking out is not either.