How To Take Off With A Short Runway: A Startup’s Guide to a Bear Market
In the bear market, a lot of startups face one of the most scary issues a company has ever to face: The Runway is getting really close. Your startup may have enough cash for 2-3 months at most. Your employees are asking for their salaries, your investors are getting too anxious about the future and what you have spent months or years building is going extinct soon… This crisis is what I call the natural selection of startups. This is the point of differentiation between the startups that will eventually fail and the startups that will go on to succeed. I have seen the brightest ideas crash and burn, and startups with basic ideas flourish and rise. As I always say, it is not about your idea but the execution behind it.
Let us go through a crisis framework that I would advise most startups to follow in order to use these times of crisis as a propulsion to later success.
The less cash you have, the less your airplane (startup) has runway to take off, a short runway leads to the plane not having enough momentum and crashing.
Phase 0: Avoid It Like A Plague
This cannot be stressed enough. Most situations could be easily avoided before they even happen. In Poker forums, where players ask about what is the most optimal play in certain situations, the most frequent answer is “Fold pre”, which means folding the hand before entering the situation. If your startup wants to be a winner on the long run, you need to avoid a cash crunch like the plague. In the seed round, you managed to fund your startup for a runway of 12 months? Great, make it 18 months. Fight for your life before it is even in danger. Cut costs of your startup like a madman, fight with your landlord over 20 bucks rent, fire poor performers, email your hosting company to give you a discount, Use your neighbor’s landline and pretend they are your secretary (just a joke, but if you do that would be hilarious). When a bear market appears out of nowhere, and you have 1 or 2 months more in runway than all the competing startups, this will make a difference. While all other startups are fighting for their life, slowing up development and marketing, and firing key employees, your startup would be cruising and way ahead of anyone else.
Now, some reading this unfortunately reached the point of no return. If you are one of them, there is still hope, the rest of the framework is for you.
Phase 1: Hit Yourself Where It Hurts
First and foremost, when the company realizes that the runway is shorter than expected (less than a year or 6 months, depends on each startup), it is time to target your deepest fears. What do you love most in your startup? Let me guess: Your shiny clean office, your employees who were or became friends and family, the shiny gadgets and first class flights and dinners for meetings. Time to get rid of all of it. As much as it hurts, there is no other solution, the overhead is killing your runway, and all of these would be gone anyway sooner than later if you do not do it yourself.
I know it hurts. I know how much it hurts going up to your employees who you promised the world to and letting them know that they have 24 hours to pack up everything and go. Some of them will cry, some of them will fight and some of them will never talk to you again, but then you need to make a decision and fast.
Now, layoffs does not need always to be that horrible thing that employees and founders pass through. If managed successfully, the damage can be minimal and can lead to a positive experience for everyone.
Here are the steps in deciding who to lay off and how to do it:
Go through all the employees and find out all roles that will NOT have a direct role in saving the startup during the bear market. This could possibly be recruiters, developers working on a long term project and the marketing team or bad performers. Add them to the list.
Now that you have the list, write a layoff notice letter. Include in the letter a promise that when the startup survives the bad situation, they will be first in the hiring list.
Create a recommendation letter praising the employee for all the good work and put it in another envelope.
Meet virtually or in office (depending on the startup) with each of the employees and explain the situation to them as it is. Do not sugar coat it. If the team is small, YOU should do each meeting. Expect lash outs, crying and people leaving abruptly.
Talk to your network and see if another industry or a company that could be hiring is interested in looking at the people that had to be laid off.
Meet the rest of the employees that you decided to keep and let them know clearly the situation and the runway left. Be completely honest and try to keep everything private within the meeting, let them know that we WILL fight through this and possibly win together, payments could arrive late and maybe the last may never arrive. Let. them know they may have to work harder since many employees have been let off.
Allow the employees who prefer safety for multiple reasons (family, risk averse etc…) to have a weekend to talk about their future with their family and friends. Give them a deadline that by Monday morning anyone will be able to submit their immediate resignation without any hard feelings. Although that will not limit other resignations down the road, more than 80% of the employees that did not quit after the weekend will fight through this with you.
Now that the hard part has passed, it is now time to punish yourself. Minimize the costs, office etc… as much as you can. You won’t regret it.
Phase 2: Destroy Your Competitor
You did what hurt, and you did for a reason. Your runway just became 150-200% longer. Congratulations. Now comes the time to reap what you sow. With the rest of your team, while other startups are scrambling to raise funds and know what to do, you work on creating INTELLECTUAL PROPERTY. In the bear market it is now time to focus on shipping the products you promised to deliver, building the framework for your strategies and building innovating new products. Making should be the ethos of the company, while marketing, recruiting, growth and preparation should be left aside. The goal is to increase the value of the company for users, investors or clients. The importance is that after a while, the bear market will be followed by a bull market, and when everyone is looking where to invest or spend their money, you would be here, with so much value in comparison to other competitors. Your team would have created so much intrinsic value that no one could reject. Rather than focusing on secondary tasks, you made sure to focus on what is necessary and everyone focuses on: utility and value.
Phase 3: Time for Take Off
Congratulations, you were able to pass through the hard days and now the market is taking a turn to the better. You built and worked hard during the bear market and now it is time to EARN. Now that the market is better, everyone wants to build and invest again. New startups are emerging, and barely sustainable startups are trying to develop new ideas. Well, good for you, you already did all that. You already built and shipped, and now it is time to take off.
Marketing, marketing and marketing. Now it is the time to show everyone what your startup is made off. Let them know that there is no “wait”, and everything is already here. Be where planes are supposed to be, in the air, the runway was long enough and now revenue and investors are here to help you continue your trajectory forward.
This part depends on what the founder has in mind: Exit the company or grow it to oblivion. Scale your products to generate more and more revenue, resume your long term goals and get back that office.
But always keep at the back of your mind, that you are back at Phase 0.
If you need help in using the framework in time of crisis, like described above, please feel free to Contact Us.
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