Economic downturns are hard on startups. My best guess, based on the experience of previous severe downturns, is that 20 to 30 percent of startups that exist now will not be around by the end of 2020.
The best way for a startup to survive an economic downturn is to pull together as a team of human beings as well as colleagues. One of my favorite things about startups is how much they already do this.
Of course, this makes it extra difficult when it comes hiring freezes, salary cuts, furloughs, and especially layoffs. With a global pandemic, letting people go feels like turning them loose in a Covid-19 world with nothing. Especially if their health care is through the company.
Here's what I suggest instead: Everyone climbs into the bunker together, and you make it work. This won't keep your company afloat if your money is gone and you can't raise anymore, but it may buy you time, and done right, it will certainly buy you goodwill.
Hit pause immediately.
Pause everything non-essential. Pause on new software or equipment. Pause on interesting ideas that might one day make money. Pause especially on hiring. Unless you are making or improving on ventilators, this is not the moment to expand.
Revenue is everything.
Investment is drying up. Angel investment is the first thing to go in situations like this, as investors see their personal worth fall along with the stock market. There will be no fat Series A rounds this spring. If you have an investment deal in process, finish it now. Accept the terms. Get it done. Ditto for mergers and acquisitions.
This is the time to focus on revenue. Can you consult? Are there services you can offer? What can you do in the short term, so you're not relying exclusively on a 12- to 24-month product cycle? How can you insulate yourself as much as possible?
In good times, companies can attract investment on a wish and a promise. Today, you need solid revenue to make it to the next quarter.
Cut salaries, but do so with care.
It is possible to cut salaries the right way, while keeping morale high and, hopefully, the company afloat. First, get your leadership team together, and put everyone's personal financials on the table. How much do you need to get from month to month? Cut leadership salaries to the bone.
Then tell the rest of the team this is what you're doing, indefinitely. Allow time for the information to absorb. This builds trust. Leadership salaries tend to be highest, so this may loosen up a substantial amount of money on an ongoing basis.
But it probably won't be enough. So after a few days or a week--this situation is changing rapidly--go back to the company and explain why additional cuts are necessary. Let your people know you're trying to keep the company going because you want them to have jobs. Promise that when times are good again, salaries will go back up. Theirs first.
The results can be amazing. When you create a bunker mentality that we'll all get through this together, it is incredibly powerful. Put your money where your values are, and people will follow you to the ends of the earth.
Furloughs--the best bad solution.
Furloughs are hard. You may not really know what or who the company is going to need most in a few months' time, and they still require the person to go without a paycheck for a few months.
Can any of your employees get by without that paycheck? Talk to them about it. You're offering a hedge against uncertainty--they'll have a job in the future--and maybe for some people the opportunity to spend extra time with their families right now could actually help.
When you have to cut, go big.
One big cut is better than many small ones, especially when you explain the situation clearly. Maybe you're cutting areas that aren't generating revenue so the parts that are can survive. Maybe you're taking the company backwards, to a smaller, simpler time when you had one product and you did it well.
What you want after the cut is for the remaining employees to feel secure and able to focus on their work. If you nibble away, cutting a few people each week, no one will get anything done, because they'll all be polishing their résumés. Or in this case, focusing the best of their attention on homeschooling their kids.
Startups are hard in the best of times, and this is not the best of times. I wish each and every one of you well, and I hope this advice helps you hold your startup together--or at least helps you manage inevitable cuts with respect.