Is your Startup in Trouble? What now?

My last blog post covered why launching a startup in a downturn can be a good thing.  So what if you’re already well into your startup and the 2009 economy has you running scared?  What now?

Hang in there and persevere, reputations are made in bad times more so than in good times.

Building on how Jason Calcanis covered this topic in his post last month, I’ve tried to provide a list of 5 key areas you need to make sure you’ve got covered.  This is not a “read the list once” and then you’re done, but a list you should go over regularly until your enterprise really hits it’s stride.

1 – How long is your Runway?

You need to figure out how much runway you have left. This is really easy to calculate: you look at how much cash you burn every month and divide that into how much cash you have in the bank. Your accountant can do this for you or you can simply look at your P&L and bank statement. Once you know how many months you’ve got left, you’ve got to do the hard work of trying to extend it by at least a quarter.  This may mean cutting staff, negotiating with your landlord and cutting any and all recurring bills. You then need to look at your revenue streams and figure out if you can double them. In most cases, if you do these two simple things, you will have increased your runway by 50-100%. If you double your runway, your chances of figuring out what your business actually is will go up exponentially.

You should also review your P&L monthly with your management team, advisors or whomever you look to for management support.  Look at every single recurring cost you have and figure out how to cut it. In an up market, this level of obsessiveness is often wasteful, because you’re in a race to take market-share.   However, this is not that time.  Consider the following analogy: Getting the most market-share and running out of cash is the equivalent of getting to the moon first without the ability to get back to Earth. Congratulations, you won the race… and now you’re dead!

Assuming you don’t cut too deep your company can still prosper, and in fact may actually be more efficient.  As Jason says: ” There is something strange about how 25-person companies seem to get more done than 40-person companies”.  Perhaps it’s because your remaining staff will be more focused with everyone well aware of the situation the company faces.

2 – Are your Investors with you?

If cash is running out, you’ve got three choices: cut costs, sell more or raise capital. We’re going to get into cutting costs and selling more shortly, but you need to know if your investors are still with you.   In these times most investors get realistic, greedy, paralyzed or some combination of all three. You’ve got to figure out where you stand with your current investors as quickly as possible, and the easiest way to do that is to ask them for more money.  You need to to let your investors know that you’ve got a cost-cutting and revenue-generating plan that in place. You need to impart upon them how much you truly believe in your business and that you’ll do whatever it takes to come out of this recession on top.  But you’ll need more money from them to get you through.

Often times, VCs and investors will sometimes send entrepreneurs in circles, either inadvertently or as leverage.  Sometimes VCs are juggling a lot of balls and can’t focus.  Sometimes they’re inexperienced and/or they have issues that don’t concern your business, like their limited partners, their fund balance, other portfolio companies, etc.  Sometimes they’re cutthroat and know that, when you’re down to your last week or two of cash, they can extract a 2-3x liquidation preference out of you.

It’s your job to force the issue now–don’t wait.  Even if you have a year’s worth of runway, you should probably have this kind of dialogue so your investors know you’re really plugged in and so you know exactly where you stand with them.

3 – Does your Product have real Value?

A week ago, Seth Godin wrote in his blog that if you want to grow, you need new customers.  And if you want new customers, you need three things:

1. A group of possible customers you can identify and reach;
2. A group with a problem they want to solve using your offering; and
3. A group with the desire and ability to spend money to solve that problem.

I continue to be amazed how often new businesses or new ventures have none of these.  Even in these times, many young companies continue to operate on the premise that “if we build it – they will come”.   Companies that operate in this fashion are, as I like to say: “drunk on their own Koolaid”.  I encourage the companies I engage with to ask for that first order early and often.  If what you have truly has value then you should be able to find customers willing to part with their money as evidence.  Your product is not be ready yet, you say?  No matter, push on, ask for the order anyway.   If you’re on your way to solving a challenging problem your target customers have been trying to solve, they may be willing to pay you early and help you get there.  That’s when you know you’re really on to something.

Also, your entire staff group should be aware of what your sales funnel looks like.  You don’t need some fancy dashboard tools or such.  Put up a whiteboard and count any sales related stat you can: sales calls made, meetings scheduled, contracts sent, deals closed, etc. Give your team something to think about other than just the bottom line and make sure you celebrate the little victories while you’re waiting to get that first sales order closed. Celebrate getting the meeting. Celebrate sending a formal quote out.  Celebrate it loud and proud to keep the momentum rolling and the whole team engaged in the selling process.  We’re all in sales and the sooner we all realize it, the better off your company will be.

4 – Is your Staff with you?

When times are dire, I prefer a “full disclosure” with your staff.  You certainly don’t want to scare the team, but you can’t afford to sugar coat your position either.  They need to know what’s at stake and you need to know how willing they are to push through this difficult time.  If you’re down to a few months of cash, you’re gonna have to cut the bottom 1/3rd of your staff, if not half.  This is not a great place to be, but you’re also going to have to cut salaries. So, here are some suggestions on how to approach this:

• Reduce your amount of non-core staff. Depending on your business, you can look in places like PR, marketing, and admin to save expenses. See if you can put some of these folks on part-time.
• Look at the salaries of your current staff compared to the current market conditions and look for ways to cut the higher-priced salaries you could get more cost effectively in the current market. I know this sounds cutthroat, but remember, this is advice for folks going out of business in six months.  Another way to run this test is to ask yourself “Would I hire this person for this amount today?”
• Go to each member of the team whom you believe is over-paid by today’s market rate and tell them that you’re probably going to be cutting their salary and that you’re increasing their options.  Ask them how they feel about it.  Some people can take a pay cut, others can’t–you don’t know until you ask.

A point of caution – cutting people’s salary instead of cutting the position is not in anyway ideal because you want the people remaining in your organization to be happy.  Tread very carefully here.  You want to make sure your remaining team is fully engaged in the task at hand.

5 – Are your Vendors with you?

You should be thinking of your vendors as partners in your business and as such, they may be a potential source of financing.  Do this now.  Contact each vendor and tell them you need six months free while you figure out your status, and if they can’t do it, ask them for suggestions on how they can help you.  Then call each of their competitors and let them know that you are willing to switch over for the first six months free.  Most vendors would rather eat some profits for six months than lose your business.  Clearly, they’ll need to believe in what you’re doing if they’re going to “invest” in your business.  If they can’t support you in your time of need, then you should find someone who will.  There is a LOT of competition out there and you can negotiate harder than you probably think you can.   Depending on the nature of your business, switching your entire vendor base out at once may not be practical let alone possible.  However, the likelyhood is there are probably a few vendors where you can really reduce your burn rate.

In Closing

As mentioned in my previous post, most people don’t have the courage to navigate a startup in this climate.  Your offering needs to be compelling to get partners and paying customers in a down turn.  If it is, that speaks volumes about you, your team and your company.  As for your team, if you stick together in the tough times, you’ll emerge extremely tight – nothing builds closer teams like overcoming adversity.

Please share your ideas and thoughts in the comment area below so that others can learn from your experiences.

Happy Startup!