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The Sky is Falling An Opportunity for Startups & Early-Stage Companies

by Matt, on 17 Mar 2020

The stock market is a sea of red. The news headlines are filled with fear, enforced quarantine, closures, and talk of a global recession. Corporate leaders and national treasuries are scrambling to take decisive action and stem the bleeding.

For many entrepreneurs and early-stage business leaders, this sounds like a death knell. Surely such devastation in the broader markets will inevitably cascade down to the little guy through austerity measures and reduced demand?

While we’re not going to downplay the severity of the COVID-19 pandemic or the trail of economic destruction it will leave in conjunction with the oil price war and the US-China trade war, we do believe there is legitimate opportunity to be found amidst the carnage.

In this edition of SPT, we discuss how early-stage businesses can position themselves to take advantage of an economic downturn – provided they follow four important steps.

IDENTIFY THE ACORN

The story of Chicken Little, also known as Henny-Penny, who tells anyone who will listen that “the sky is falling” after an acorn falls on her head, has become an established idiom for hysterical behavior under a mistaken belief that disaster is imminent.

And, while disaster may well be imminent in certain parts of the world or certain sectors of the economy (indeed, declarations of such have been made in several jurisdictions to unlock federal aid), this doesn’t necessarily mean the end of the world as we know it.

Just as Chicken Little would have been well served to identify the acorn and distinguish it from the bigger – and far more critical, if falling – sky, it behooves business leaders to clearly identify what is actually being affected within their sphere of operations.

Sphere of Operations

The Dow Jones stock index has been plummeting, alongside other global stock price indices, but does that necessarily signal a reduction in business for other corporations or smaller players competing in local markets?

Each business will have a unique answer to “what fell on my head?” The ripple effects of diminished industrial activity, lower oil prices, negative consumer sentiment, restricted movement of goods and people, and so on will affect all of us to some degree, but it’s important to zoom in on the specific drivers that affect demand for your product or service.

To succeed in any economic environment, a business should solve a customer’s need in a way that the customer appreciates and for which they are willing to pay. If you aren’t meeting that basic requirement, an economic downturn will only hasten your demise. For everyone else, the question becomes: Was the thing that just landed on my head really an indication that demand for my product or service is falling?

In other words: given your current understanding of the various crises that are playing out around the world, will there be more or less customers for your solution and will the need it addresses become more or less critical to them?

STAY FOCUSED ON THE CUSTOMER

As a successful entrepreneur, you will have spent considerable time identifying your ideal customer, understanding his/her needs, and tailoring your solution and its value propositions to meeting at least one critical need on that list.

How is your ideal customer being affected by the downturn?

Very likely they will be trying to cut costs in the face of falling revenues. If one of your value propositions involves delivering similar or better results than your competitor’s solution at lower cost, now might be a great time to reach out to potential customers with a recommendation to switch.

They might even be willing to accept a less-complete solution to take advantage of the cost savings. If you succeed in capturing marketing share this way, your focus should shift to closing critical feature gaps so that those customers don’t switch back to your competitor when times improve.

Your customer might also be looking for flexibility in quantities, delivery options, or payment terms. As a small business, you should be far nimbler than your larger competitors. Look for ways to tailor your product and service delivery that makes the customer’s life easier, where established corporations are bogged down in the standards and procedures that previously helped them operate at scale.

Being careful not to become a nuisance by over-communicating, ask your customers how their business has been impacted and how their needs are changing. Use your deep understanding of the niche you serve to listen for subtle changes in need that you might exploit.

Is there an opportunity to modify your offering slightly to serve the customer’s immediate need more effectively, even if the improvement will have little or no value in the long run? Larger companies will only invest time and money into product improvements with large, long-term market potential. You can take market share from them by rapidly responding to short-term, scope-limited opportunities.

Last, but definitely not least, maintain your integrity and never, ever exploit a difficult situation to make outsized profits. Price gouging and other market manipulations always appear in the wake of a disaster like vultures circling a carcass. Let’s just say it’s not the way to build a long-term, reputable business.

SLOW DOWN AND TAKE YOUR TIME

When business is booming, no one has time to listen. It’s one of the most vexing paradoxes of early-stage business. Right when your prospective customers have money coming out of their ears, you can’t get them to pay attention!

A similar phenomenon can occur when a major reversal first occurs. Panic ensues and everyone becomes too busy trying to understand what’s happening, predicting what might happen next, revalidating all aspects of the business, and looking for the least painful actions to take in response.

After a short time, however, calmer heads prevail, and urgent action replaces hysteria. Resources are marshalled to help manage the crisis and clearer objectives emerge from the dust storm kicked up during the initial panic.

Once things settle down, your customers will usually have more time to listen to new and creative ideas. Their focus will be on finding ways to break the status quo and deliver improvements to their wounded business, rather than the blinkered repetition of established processes that typifies periods of rapid growth. This is a great time to bring your disruptive solution to their attention.

Be sensitive to where each customer or prospect is at on the spectrum. If they’re consumed by internal machinations, politely let them know that you’re ready with new solutions once they’re open to the conversation. If they’re already looking for answers, schedule a meeting (using Zoom is a popular option!) and explain concisely how you can help.

inbound sales methodology for startups

From an internal perspective, your business can also take advantage of the enforced slow down.

Startups are always in a hurry to get to market, grow sales, and reach profitability before the cash runs out. However, being forced to slow down and earn those sales more gradually can give you a chance to hear and incorporate more customer feedback, resulting in a more mature product, better aligned with customer needs.

CASH IS KING, LONG LIVE THE KING

Nothing new here. No matter what’s going on in the world around you, as an entrepreneur you must focus on judicious cash management.

Armed with a careful evaluation of how macro developments are likely to affect demand for your solution, revisit your short- and long-term cash forecasts to ensure your business is appropriately capitalized.

If your new forecast shows delayed growth that risks exhausting your cash, look for ways to correspondingly reduce costs (or slow down cost increases) to extend your runway.

If that still leaves you short of cash under reasonable forecasting assumptions, make plans to raise additional funding before things get critical. Don’t wait until the last minute, hoping to squeak by. As the popular investment saying goes, it’s easy to raise money when you don’t need it, and remarkably hard once you do.

Contrary to what you might think, investors don’t hide under rocks whenever the storm clouds of an economic downturn are gathering. For the most part, they’re focused on the future, investing in things that will impact the market 3, 5 or even 10 years from now.

Raising Money in Times of Chaos

We couldn’t immediately find data on angel investment trends during a downturn, but a 2019 paper on “VC investment strategies under financing constraints” by researchers from Switzerland, Denmark, and the USA reported that startups, in aggregate, received the same levels of VC investment during the 2008 financial crisis as during non-crisis times.

The authors did, however, note that investors tend to more strongly prioritize investments in their core areas of expertise during a financial crisis. This has the knock-on effect of making startups funded during a crisis on average more successful than those funded at other times – presumably because investors are better at investing in areas they know well than ones that they don’t!

The bottom line here is threefold: pay close attention to your cash, don’t be afraid to raise more if you need it, and, if you raise, focus on investors with prior experience in your line of business.

NEXT STEPS

Avoid being paralyzed by Chicken Little syndrome. Take a deep breath and see whether an opportunity might actually have fallen into your lap.

  • Identify the Acorn - Given your current understanding of the crisis, will there be more or less customers for your solution and will the need it addresses become more or less critical to them?
  • Focus on the Customer - How is your ideal customer being affected? Is there an opportunity to modify your offering slightly to serve the customer’s immediate need more effectively?
  • Take Your Time - Once things settle down, customers will usually have more time to listen to new and creative ideas. Also take advantage of the enforced slow down to hear and incorporate more customer feedback and produce a more mature and aligned product.
  • Review Cash Needs - Armed with a careful evaluation of how macro developments are likely to affect demand for your solution, revisit your short- and long-term cash forecasts to ensure your business is appropriately capitalized. Look for ways to extend your runway. If necessary, make plans to raise additional funding before things get critical.

Keep Going, Entrepreneur!

Photo Credits

Photo by Matthew Fournier on Unsplash
Photo by Guillaume de Germain on Unsplash
Photo by "My Life Through A Lens" on Unsplash
Photo by Dan Meyers on Unsplash

Topics:LeadershipLaying the Foundations

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