8 tips about how startups can survive the next recession from Sequoia Capital backed Mixpanel founder

As the impact of the coronavirus grows, triggering stock market uncertainty, massive declines in oil prices,  early stage startups, small businesses and middle market companies must stay apprised of the latest risks and challenges related to the outbreak and their businesses. From production and supply chain interruptions, to consumption and tourism to diminished workforce mobility, problems are mounting. Google just told more than 100,000 North American employees to stay home amid coronavirus fears. Business leaders and startup founders must stay informed to mitigate risks and plan accordingly.  

The recent financial shock will most likely cause upper-income households to pull back on spending. Roughly 40 % of households are responsible for 61.4% of overall spending. Because the upper two income quintiles are sensitive to volatility in asset markets, forward-looking policymakers, investors and firm managers should anticipate a temporary downturn in consumer demand.   

According to a recent RSM article titled “as coronavirus spreads, demand destruction will set in” Moody’s Analytics recently estimated that global demand for autos will decline 2.5% instead of 0.9% because of the Covid-19 virus. The revised estimate of global auto purchases indicated that the outbreak will reduce demand and disrupt supplies of parts and raw materials for the auto industry. 

According RSM’s article the author stated “ln the U.S., where 30% of all components used to build homes come from China, we expect a significant slowdown in construction over the next several months.” The RSM Monthly Economic Activity Index is now suggesting underlying GDP growth of less than 1.5% in December and January (1.43% in December and 1.44% in January); that is one of the major catalysts for our downward revision of growth in the first quarter of this year to 1%, the second quarter to 0.7% and 1.2% overall for 2020.     

The last time the U.S. experienced such a financial shock was during the last 90 days of 2018. During that period, retail spending contracted sharply during the following 60 days and overall household spending growth declined from 3.5% to an average of 1.2% during the next six months. While the downturn will be transitory, in selected sectors of the economy and the business community it will be large and the impact will be felt in coming days and weeks. 

According a report from Morgan Stanley’s Chief Global Economist, Chetan Ahya, has now formally adopted a base case scenario that assumes the coronavirus outbreak peaks in April/May, pushing down global GDP growth to 2.3% in the first half of the year, before recovering in the third quarter of 2020.

No one knows how long this global pandemic crisis will last and if it will get contained and calm down or drag down the economy into a slow down, but recently Suhail Doshi, a cofounder of an app analytics software company called Mixpanel started Twitter a thread where he gave 8 tips to startups on how to survive a recession or macroeconomic stress test. He mentioned his experience during the financial crisis saying “I had to quickly learn mid-2009 during Y Combinator, I was 20, and had just raised $500K. The ordeal would last ~18 months.”  Here are his 8 lessons for startups to survive an slowdown.   

1 Diversify 

If you’re only selling to primarily startups, a cash crunch will increase the rate of startups dying from “natural causes.” So, if you’re able, now is the time to diversify. If not, work on annuals to shift out the risk. You will still be able to sell to startups, just fewer.  

2 Focus on building core business products/models/services 

Now is a good time, as you brace for impact, to get really focused with the resources you have instead of what you could have. Try to double down on your core products vs risky endeavors. You don’t need to stop hiring but a way to shift risk is to get pickier with hiring.  

3 Due your due diligence on your investors 

Beware of investors who will take advantage of you: in the darkest moments, multiple VCs wanted to find our 2-person team a CEO. I think the environment has greatly improved but it’s been a while since investors had the same power. They will get picky with investments too.   

4 Unit economics will matter more 

One of the most important metrics that people will care about is if you *can make money*. That’s why B2B after 2009 grew so rapidly later—out of necessity certain startups are born. The stress test is why folks feel it’s a great time to start: a lot of the right behaviors get enforced.   

5 VC deals may get tougher during a recession 

In 2011, we went out to raise our Series A. Things had calmed down for seed but we quickly got passed on by 11 VCs. We were doing $45K/mo which grew to $190K a year later. We were forced to raise a seed round bridge that barely came together. There’s no shame in this. Raise what you need.   

6 Startup due diligence checklists will matter more 

Expect investor decision making to take longer if things worsen. I’ve talked to many founders waiting till they had 2-3 months of runway. This correction will feel surprising & create unnecessary stress so plan ahead. Due diligence will get more intense—have the numbers ready.   

7 During economic slowdowns being honest and transparent with your team will help

It’s never been more important than right now to be honest with your team around burn rate, odds of success, areas to focus, etc. The folks who stick around will appreciate it & work hard. Some others might move to more stable pastures–that’s fine. It’s all hands on deck.  

8 Get Lean and scrappy 

It’s time to get lean & scrappy culturally. Being lean means removing expenses that are unnecessary. The right employees don’t care about free Kombucha. Being scrappy means finding clever solutions to otherwise difficult, time costly, or expensive options.     

Conclusion

As growing startup companies are learning to navigate in today’s uncertain global environment, on demand CFOs can play a much larger role advising strategic risk management, in the C-suite and across the whole company. Having enough liquidity is to weather the storm will be important. Corporations need to define scenarios tailored to the company’s context. For the critical variables that will affect revenue and cost, they can define input numbers through analytics and expert input. Businesses should model their financials (cash flow, P&L, balance sheet) in each scenario and identify triggers that might significantly impair liquidity. For each such trigger, companies should define moves to stabilize the organization in each scenario (optimizing accounts payable and receivable; cost reduction; divestments and M&A).