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How should a high potential startup react and take advantage of the crisis

Apostolos ApostolakisApril 8, 2020

In the last 15 years, I’ve been involved with tech startups, either as an entrepreneur or as an investor, I have had my fair share of dealing with crises, with a few being existential ones for the companies I was involved with. While I don’t claim that at the time all our reactions were optimal, I have certainly gained experience both from things that worked or not but also from actions I realized in retrospect should have been taken. While no size fits all, I am sharing some ideas that should be relevant for most startups and provide food for thought regarding the actions a founding team could take during this crisis.

Crises offer a moment of truth for companies and even more so for startups.

Startups are companies on steroids having prepared for enormous growth so when there is an abrupt change in market dynamics, they must adjust even deeper and faster in order to survive. How a startup copes with such a stressful situation is revealing about its capacity to successfully overcome the crisis and realize its potential.

So, what would one expect to see as a reaction from a high potential startup that seeks to successfully navigate through a crisis?

 

Rigorous and quick assessment

High responsiveness starts with a quick but rigorous assessment of the situation. Tech startups should be data-driven and therefore able to come up sooner with insights. In our case, the corona crisis has 2 order effects. There is the first order highly disruptive effect due to the lockdown in most countries and then there is a recession that will follow resulting in lower demand for a period of time. The team needs to assess the impact for their specific business and plan for the short term, highly disruptive 2-month period while also preparing for the medium term: the 9-12-month period after. Founders are by nature optimistic but it is preferable to lean a bit more on the conservative side and assume slower recovery. In a crisis, it is better to plan more conservative at the onset because it is harder for an organization to undergo tough measures more than once. On the other hand, a startup can more quickly re-adjust for growth if conditions improve.

 

Decisiveness and speed of adjustment

Startups are expected to be agile and adaptable and a crisis puts that expectation to a test. After an assessment of the short and medium-term impact, decisions need to be taken and implemented the soonest. These decisions often unavoidably include among other things, letting go of people, salary reductions, closing of specific units or exiting markets. It might be the case that adjacent business opportunities are to be exploited but typically the decisions to be taken are very painful. As a result, founders and senior leaders sometimes delay implementation either because they cannot accept the new reality or they have some runway and secretly hope that those tough times will not last for long. There is an understandable fear delivering bad news to an organization but decisiveness is key. Any delay in acting means a shortened runway that limits options and reduces chances of survival and recovery for the startup. It should be clear that the crisis was not a mistake of the team and the painful actions to be taken are necessary so that the company survives. The earlier those decisions are implemented the better.

 

Frequent and candid communication

Frequent and clear communication is always important but in times of crises it becomes imperative. These are times of high anxiety, rapid change and need for adjustment, therefore communication becomes even more important especially in teams above 50 people where information does not flow informally. When startup employees are exposed on a constant basis to bad news regarding the economy and other startups, most of them imagine the worse for their company, get worried and become counterproductive. These are demanding times and founders find themselves firefighting on many fronts, but that doesn’t mean they should neglect frequent and candid communication. Leaders who communicate often and with candor, build trust and align the organization towards the purpose of overcoming the adversity.

 

Culture check and Team alignment

Speaking of alignment, even in good times ambitious startups should be characterized by a sense of urgency and purpose. Startups who are up for changing their industries have a higher purpose and employees who are part of the story should feel energized and powered up by the prospect. Having said that, company size, typically after the 100-employee mark, comes to the expense of that sense of purpose and alignment. As an effect of high growth, companies hire many new people in a short period of time and that makes it harder for all employees to stay close to the leadership team and share the sense of purpose and urgency. A crisis provides an opportunity to assess to what extend people are aligned with the values and vision of the company and are willing to go the extra mile. In a crisis, people will be asked to make sacrifices, such as a salary cut, and how they respond to that request is revealing of how close and aligned they feel with the company. The management team clearly needs to lead by example in a crisis by taking a bigger hit but all team members should contribute commensurately. Even if the alignment is not a strong one, the crisis provides the opportunity for the leadership team to unite people around a common goal. People bond in adverse conditions and it is up to the leadership team to instill this solidarity for the common goal of overcoming the crisis and enabling the startup to emerge stronger. How easily a team embraces and provides suggestions around the necessary measures to be taken is testament to the strength of their alignment and culture.

 

Work on the basics: unit economics and profitable growth

In good times, startups focus mostly on growth-related activities since growth is the main KPI they are judged on. This focus often comes to the expense of longer-term investments on internal processes, scalability of tech, or other automations. There may be projects that have been identified but are postponed and instead resources are utilized to improve sales and marketing activities that directly contribute to growth. Often growth pains are addressed by throwing people on the issues rather than taking the time to automate processes which can improve unit economics. When growth is not possible due to lack of demand, there is an opportunity for startups to invest in processes and build a stronger core with better profitability metrics. It is also safe to assume that there will be a shift in investor sentiment towards profitability metrics. Next round investors will be more focused on unit economics and the ability of the company to become profitable in the medium term vs. just looking at the big vision and long term potential as was the case in the last few years. A crisis presents the opportunity to take care of housekeeping, and the founding team should think of how to enable the company to step on the gas in a more efficient and profitable way once the disruption is over.

 

The points above are some ideas about how a startup can cope with the crisis and the opportunity a crisis provides for a sanity check. A crisis presents a unique opportunity for founders and leadership team to look inward and re-evaluate the adaptability of the organization, the communication flow, the culture, and team alignment, as well as the internal processes and core of the company.

 

This existential, for many startups, crisis will reveal weaknesses and strengths. I am certain that some of the companies that will work hard and improve on their weak spots will overcome this unprecedented crisis and will have the opportunity to build hugely successful and impactful companies.

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