Remove Friction from Your Business to Weather Foul Economic Conditions.
With all of the noise surrounding the turbulence in today's economy, it is worthwhile to add to the stack of digital news if only to share some thoughts with growth company leaders on managing through a downturn.
As Y Combinator (YC) said:
"Please reassess your beliefs on a monthly basis to make sure you don’t drive your company off a cliff."
Or, as the pilot on my last flight said, “Please buckle your seat belts. There is some rough turbulence ahead.”
The one thing we know now about the course of the current negative economic forces is that nobody knows now what will happen. There are comparisons to past recessions, predictions of other potential shock events, unknown responses from meetings of global political and economic leaders, predicted rapid bounce backs, and even attempted correlations to social media company earnings. All manner of outcomes have been forecasted – which one(s) you accept depend on who you are listening to at the moment.
One theme common to most economic downturns is that capital access becomes more challenging for growth companies. While there are still large amounts of uninvested money in the system, funds will slow down their rate of investment until they have a better sense of where they are headed and their portfolio companies’ liquidity options and cash needs. This will result in them feeding growth ventures more slowly and deliberately. Funds will hold more 'dry powder' for existing investments versus putting money into new investments. They will also be more judicious and selective when deploying additional capital into their existing portfolio. As YC rightly noted, growth companies have to develop plans to extend their cash timelines.
There are only three ways to do that:
Increase cash collections through increased sales and lower accounts receivable
Decrease cash obligations by reducing expenses and renegotiating terms on recurring accounts payable
Increase gross margins by reworking processes and systems to extract productivity gains
Many growth company leaders react by focusing on cash as an input to managing through the downturns. By focusing only on cash, they can make short term cash reduction decisions that can have unintended longer term consequences impacting customers and employees. This can put the company into a death spiral as customers cancel and key employees move to other companies, leading to tightening the cash noose even more from frequent short-term cash reduction decisions.
The companies that exit the downturns on top focus on cash as a by-product of properly operating the business. They deliver value to and support their customers, pay attention to the levers of the business that remove inefficiency, they invest in their people to reduce uncertainty in their minds, and they over-communicate internally and externally. In most cases growth companies can find productivity gains without making hefty cash investments. At this point in their growth, most companies have accumulated a lot of operational debt -- to borrow a term from software engineering. Leaders clear that debt by turning their attention to their operations – rebalancing the process, people, and capital needs of the business’s operations.
If they must take on capital to extend their runways they need to look to the sources they already have in the company -- increased sales to and cash collections from customers and, when necessary, bridge loans from existing investors. Like buying stock at its peak, taking on new outside capital when it is most expensive to a growth company has to be a last resort.
So, in this moment of economic uncertainty, the overused saying "Slow is smooth; smooth is fast" takes on more gravity. Under stress, companies either rush decisions, becoming reckless, or decision-making becomes paralyzed. The path to moving faster through turbulence is steadiness and finesse -- financially, operationally, and organizationally. Big, unbalanced moves swamp boats; big, unplanned changes swamp companies. A strategy built on many small adjustments and experiments can accrue in value to the company that is steadfast, especially during uncertain periods like the one ahead.
As we know from every other economic downturn, the only path is through. In the coming turbulence, no matter what shape it takes, focus on:
Delivering value for your customers
Removing or reducing operating friction, and
Tracking the metrics and mechanisms that matter to keep you “default alive” (YC, 2022).
In that order.