Intelligent cashflow management is the essential fuel of startups and digital businesses.
Surviving means having enough money to endure a downturn without raising additional funds.
Thriving means getting through this period while remaining profitable and accelerating growth.
It is a crucial moment.
International firms and fund managers agree that a deep global recession is a major market risk. The latest International Monetary Fund (IMF) World Economic Outlook indicates that global growth has downshifted from 3.4 percent in 2022 to 2.9 percent in 2023 (growth was 6.0 percent in 2021).
We researched what startup founders and CFOs need to do right now (and for the foreseeable future) to survive in a challenging economy.
Below, we’ve neatly summarized 52 pages of advice from Sequoia Capital’s 2022 founder survival guide.
We also talked to Onfolio’s CFO, Rob te Braake, about managing risk to survive and thrive in a downturn.
But first, consider this:
Will you survive or thrive?
From a cashflow perspective, businesses rely on two sources of income: investment (including loans and other funding sources) and revenue.
Unlike established companies, startups and digital businesses rarely have large cash reserves. It means there are insufficient funds to fall back on during a downturn.
Cash reserves are separate from working or operating cashflow. A cash reserve is the money you have in the bank that is not needed for working capital. This money is either a surplus from funding, or profits after costs have been covered and money put aside for taxes.
On the other hand, cashflow is the money you use to run your business (often a combination of revenue and operational funds from investors), also known as a startup’s runway.
When your revenue is limited or doesn’t cover operating costs, your company is in a negative cashflow position (in other words, you’re losing money).
Poor cashflow management kills businesses.
It’s killed the biggest companies in the world — Enron, Blockbuster, Blackberry, and numerous others.
No matter how fast you’re growing, you could be destined for the startup graveyard if your outgoings exceed your revenues.
The top 12 reasons for startup failure show that poor cashflow management is the number-one killer of startups and digital businesses.
Founders must work hard to balance the competing needs of achieving profitability while cutting costs — usually without raising additional funding.
Whether you’re bootstrapping or have raised funds, keep scrolling to see practical steps for surviving and thriving during a downturn.
The founder survival guide
Founded in 1972, Sequoia Capital is a world-leading Venture Capital (VC) company with approximately $85 billion in assets under management.
Notable Sequoia investments include Apple, Cisco, Google, Airbnb, YouTube, WhatsApp, Stripe, Dropbox, Zoom, and numerous others.
It’s accepted that Sequoia is a VC firm worthy of respect.
In June 2022, Sequoia published an internal report titled “Adapting to Endure.”
This was a 52-page monster presentation to their founders so we’ve broken it down into nine actionable insights for you.
1. Capital was free. Now it’s expensive.
When the capital was free (or very cheap, thanks to low-interest rates), the best-performing companies burned through money like there was no tomorrow.
Now that capital is expensive, they are the worst-performing companies. Investors are avoiding businesses that aren’t already cashflow positive or don’t control their burn rates.
In other words, spending money quickly wasn’t a major issue. Now it is.
You could always raise more. Now you can’t.
Making a profit is cool. Running at a loss is not.
2. Given that every dollar is more precious than it was, how will you change your priorities?
For example, if you spend $2 to earn $1 in new revenue, is there a more cost-effective or less risky way to generate the same (or more) revenue?
Founders must review spending line items and identify the areas generating the greatest returns.
Double down on those. Cut or reduce your spending elsewhere, provided that you aren’t making short-term cuts that will impact long-term growth rates.
3. This is the 3rd largest Nasdaq drawdown in 20 years
61% of all software and digital companies are trading below their pre-pandemic (2020) prices. Last year, over 150,000 tech sector workers were laid off, and over 77,900 lost jobs in this sector in January 2023 alone.
Because of the state of public and private shares, the ‘golden trifecta’ for investors is a company that’s cashflow positive, profitable, and can generate better returns than the stock market.
Right now, the stock market isn’t hard to beat. If your company is profitable, you’re already in a strong position.
4. Growth at all costs is no longer rewarded
Investors are choosing businesses that will generate near-term certainty, i.e., a return on investment (ROI) within a shorter timeframe than their pre-2021 investments.
A shorter timescale could mean anything from a monthly or quarterly dividend up to a guaranteed ROI within 18 months to 3 years (rather than the 5+ years that were accepted pre-2021).
Investors prefer to put money into a company that will generate dividends at any rate that beats stock markets rather than make a long-term bet on a high-growth company that might achieve an exit in 5 years.
Certainty beats speculation right now.
5. Profitability should be your #1 goal as an owner or founder
Aim to be profitable enough to pay yourself a decent salary (enough to cover your living costs and have money spare), cover business overheads, and keep cash in reserve.
If you’re looking for a buyer or investor, have solid numbers to show them. In Onfolio’s case, the investment criteria are established businesses generating annual profits over $500,000 in sectors and niches with high-growth potential.
It’s not easy to execute, but your goal is simple. Keep asking yourself, “are we profitable?” If the answer is no, do everything you can to get there quickly.
6. Cheap capital won’t come to the rescue
Without the metrics to support why you deserve funding, investors aren’t lurking around the next corner, ready to leap out with a check to fund your Series B round. Investors want to see cashflow-positive businesses generating a monthly recurring revenue (MRR), not the hope of getting 10x their investment in five or more years.
Digital businesses that generate real returns (cash in the bank) are far more attractive to investors and buyers.
7. Be prepared to ride out this market for 2 to 3 years
Question: Who will survive?
Answer: The business that achieves and maintains profitability quicker than its competitors.
You must think about where you can best invest your resources, time, and energy when reallocating budgets.
Aim for profitability, and consider one of the four options for creating financial freedom that Sequoia outlines next.
8. The top 4 ways to become more financially secure
- Ideal: Earn more from your current customers. Deploy strategies and technology to generate more revenue from your customers (keeping churn to a minimum). For example, if you’re a website owner without a subscription upsell, now is the time to implement one.
- Good: Improve unit economics. Cut budgets on expensive customer acquisition costs (CAC) and strategies and improve payback periods/ROI. For example, if you’re a startup founder focused on enterprise sales with a 12-18 month cycle, try switching to a smaller business market, where the sales cycle is shorter, and the ROI is significantly faster.
- Not great, but it could be worse: Cuts. Make any cuts necessary to survive the next 24 months without raising additional capital.
- If all else fails: Raise equity or debt, even if it’s expensive and you have to give away more than you would have considered in a stronger economy.
9. Change is inevitable. Growth is optional.
Not every company will grow as much as founders might want in this environment. Most digital business owners would love 3-5x growth, but you can’t wave a magic wand or use the latest AI tool to achieve this. However, our article on how to 3-5x growth will give you some ideas!
How can startups and digital businesses survive & thrive in a downturn?
Let’s move on to the advice and insights we received from Rob te Braake.
Rob is the Chief Financial Officer at Onfolio, a serial entrepreneur, and a trusted financial advisor to dozens of digital companies, founders, and investors.
We asked Rob the following questions:
- What are the top 3 challenges digital businesses should watch out for during a financial downturn?
- What should a digital business owner do to prepare for tight economic conditions?
- Is it worth raising investment if you’ve not done so already?
- How would a startup CFO mitigate risk if a company isn’t yet profitable — without cutting costs so much that growth shrinks?
- What are the top 5 metrics that need smart management during a financial downturn?
Rob has a wealth of experience guiding founders and owners on financial management, so we were interested to hear his thoughts on how digital businesses can survive and thrive in challenging times.
What are the top 3 challenges digital businesses should watch out for during a financial downturn?
The first challenge they must watch out for is managing cash flow, especially operating cashflow (OCF).
If you aren’t sure what this means, operating cashflow (also known as operational cashflow) is the amount of money a business generates from normal operating activities, such as the sale of goods or services, within a specific timescale (e.g., a year, a quarter, etc.).
That is always a challenge, but it’s life-saving priority number one in a downturn.
If you don’t manage operating cashflow well, you might as well just stop now.
The second is to carefully watch for a change in the temperature, the operating climate, and how that impacts your revenue streams. Many people look at the historic trends and think, “oh, we’re fine. We have traffic, sales leads, and revenue coming in.”
They expect, subconsciously, that all of that will continue.
And if the market changes, as is already happening across dozens of sectors and markets, you have to get ahead of those changes so you’re ready and able to ride out the storm.
In the digital sector, the weather can turn really fast.
If your web visitors reduce, your conversion rate goes down, and your revenue-per-click takes a hit, then you’ve got three compounding effects that are difficult to handle in combination.
This can quickly become a perfect storm that many founders will find hard to navigate, and it’s the sort of thing that sinks businesses.
The biggest challenge is number three.
You need to understand who your clients are and how important you are to them.
Do they need you, and how badly do they need your services?
Or who is your audience, and why do they visit or engage with your website?
Because if you’re disposable, you could be the first off the list when your customers need to cut spending. It’s crucial to take a realistic view toward understanding how likely it is that your customers will churn.
If you’re running a bookkeeping business, customers are unlikely to churn because they still need their accounts done even if the weather is bad.
However, other digital businesses will struggle because there’s a compound effect; your clients struggle, they cut budgets, your revenue goes down, and fewer new clients want your services.
What should a digital business owner do to prepare for financially difficult times?
The first thing is to compare the duration of your commitments (e.g., fixed and variable costs) to your revenue.
So, it’s all multi-year contracts if you have long-term clients, such as Enterprise SaaS. In this scenario, you can afford longer-term commitments to keep growing your business.
However, if you’re running a website where a visitor today will not come back tomorrow, you’ve got zero revenue security. Every day or week, you have to invest time and costs to pull in new web visitors.
To keep your website running your costs should be flexible, short-term, and easy to cut.
In that scenario, if your revenue decreases, you can immediately reduce costs too.
Is it worth raising investment if you haven’t done so already?
There’s no one-size-fits-all answer for this.
It depends on the market, your sector, and your ambition. If you want to build a lifestyle business and earn a hundred or two hundred grand a year, you’re unlikely to get (or need) investment.
For investors looking for digital businesses with high-growth potential, you need a solid, proven, repeatable revenue stream (or several), along with strong fundamentals.
Plus, and this is crucial, the ability to keep growing. That’s so investors or buyers will have a much bigger upside, either by buying the business or investing at this growth stage.
On the other hand, if you are a startup in a super-competitive market, you have to raise investment. Without it, you’re not going to be the winner.
Unfortunately, it’s now a lot harder to do that, so you need to be in a strong position (such as already making a profit) when you seek investment.
Despite the current investment market conditions, there’s still money available for attractive businesses.
However, even if you are profitable, it will take longer to raise capital. The investment process is slower, due diligence takes longer, you’ve got to have everything in order before getting the ball rolling, and you won’t get as sweet a deal as you might have got a year ago.
How can startup CFOs mitigate risk if a company isn’t yet profitable without cutting costs so much that growth reduces?
One of the best ways is to keep salary costs as low as possible. If you’re already at the stage where you need full-time staff, consider outsourcing to lower-cost regions, such as Central & Eastern Europe (CEE), Latin America, and South East Asia.
Even if you raise 6 or 7 figures in the UK, Europe, or the US in particular and need tech talent, it’s harder to recruit the skills that would drive your digital business because salaries are so high.
In some cases, ex-FAANG software engineers can command starting salaries that are higher than some startups’ seed rounds.
A better approach is to expand the talent pool at a lower cost. Because lower salary costs also mean less overhead and zero office costs because your team works remotely.
So, the lower your fixed costs are, the more flexible you are in dealing with downturns and changes.
And finally, what are the top 5 metrics a digital business CFO or founder needs to manage carefully during financial downturns?
Only two are universal for every company, whereas the other three are more sector/niche and specific to different business models:
- Operational cashflow. Absolutely mission critical for every business.
- Runway. How much cash do you have in the bank? How long can you keep going without raising any additional money? You need to consider this in light of your current burn rate and expenses and consider ways to reduce these while increasing revenue.
- We need to consider sector-specific issues such as potential changes in volatility in your revenue. In other words, how essential is your business to your customers or audience? (Especially for website owners and operators). If the answer is not very, then you are at a greater risk of losing customers and revenue.
- Alongside this, keep monitoring the cost of acquiring new customers and their lifetime or visitor value. If costs are going up, but the value is going down, then you’ve got a problem that needs fixing quickly.
- Remember that every business is different. There’s no simple, plug-and-play solution that will fix cashflow for your business. What works for one won’t always work for another. You need to monitor the numbers, keep projecting, and think of the best solutions to drive growth forward — keeping costs down while ensuring revenue, profits, and cash in the bank continues to increase.
What stood out?
Anyone currently building or growing a digital business in the current financial and macroeconomic climate would be wise to take Rob’s insights and advice on board.
Likewise, the further detail in the Sequoia Capital presentation is worth a read.
Three things stood out for us:
- Cashflow is king! It’s always been this way, but now we’re operating in an environment where raising capital is difficult — unless you’re already in a strong financial position.
- Reassess your assumptions. In particular, how essential is your business to your customers and audience? Do they need your products or services, or are you a ‘disposable cost?’ If so, what will you do to increase your value and encourage current customers to stay with you or spend more?
- Adjust costs wherever possible while ensuring you don’t kill growth. Spend money wisely. Monitor and track everything.
For further tips and advice on monitoring your business finances, see our earlier piece on cashflow management.