Top 10 Things To Do As An Entrepreneur in Navigating The Storm

If your time to you is worth savin’

And you better start swimmin’

Or you’ll sink like a stone

For the times they are a-changin’

• Bob Dylan

We are definitely in interesting times. But we have been here before. And if you are an old-timer like me, you have been here many times. For many of you, however, you may have not witnessed any time like this in your working career.

I will not repeat how we got to where we are and why, but I refer you to a couple of previously published Maverix thought leadership pieces we wrote as a reminder: https://medium.com/@peter_hass/the-impact-on-private-equity-venture-investing-in-an-inflationary-environment-a9a3cc444767 and https://medium.com/@helenbzhang/un-icorns-are-coming-d0983cd989fa.

We fully expected the first shoe to drop — the valuations brought to dizzying heights, especially from 2019–2021 would be brought back down to earth and will revert to the long-term mean. If you are not sure what that really means, go back to valuation expectations at around 2015 or so, but not immediately before the pandemic as valuations already hit historical highs by then. The second shoe is now more likely to drop — a recession. It is still unclear how severe such a recession might be, but using historical comparisons, expect it to last 18–24 months.

What does this all mean to the stakeholders of technology-based companies today?

1. The markets have readjusted their valuation expectations to approach the long-term mean. Private market valuations will lag public company valuations by likely 6–9 months.

2. The markets are re-balancing their mix of expectations between growth and profitability, especially at the later stages of company maturity. The growth at all costs mantra will be replaced with a growth with profitability mantra. The profitability does not need to be immediate, but positive unit economics will be a must in the near term.

3. The expectations that companies can burn cash forever will disappear. There will be more focus on right-sizing costs of the organization to meet near-term revenue expectations.

4. The Canadian IPO window will be closed for at least the next 12–24 months except for those companies that are viewed as ready and high-quality. For example, for SaaS companies, the Rule of 40 (revenue growth percentage plus EBITDA percentage of revenues) will return as the minimum benchmark after largely disappearing starting in 2019. Companies with a smaller base of revenues or market cap will continue to struggle.

5. Acquisitions by foreign-based acquirers or buyout private equity funds will be on the rise again. Combined with a lower valuation compared to their peak values, expected decreases in liquidity of capital, especially on the Canadian exchanges and currency arbitrage will cause many of these companies to look “cheap” to potential acquirers.

So, given these expectations, what is an entrepreneur of a technology-based company to do to steer their company through this double whammy of a storm? Here is our Top 10 list of things to do to get you on the other side of the storm.

1. Remain calm!

Keep your head while everyone around you is losing theirs. This is a time for leadership. Your team will be paying much more attention to your behaviour and actions. Pay very close attention to your team and over-communicate. Do not paint a rosy or unrealistic picture. Be honest and sincere. Share your vision of how you and your team will navigate the storm even as waves are crashing over the deck.

2. Ensure alignment with your investor stakeholders.

It is very easy to be aligned with your investors in good times. But the test for a great investor is to observe their behaviour when times get very tough. Are they jumping in with you and helping you grab a hold of the helm? Or are they just reminding you that you haven’t hit the expected plan and are pointing to the budget variance on travel or meals & entertainment expenses? You need to align expectations with them now! It might mean extra dilution for them. It might mean a “cram-down” round. They will have to decide whether they really cared about your company, or whether they only cared about the unicorn status of your company that they created by offering a foolish valuation in the first place.

3. Assess and keep a tight rein on your cash position.

If you have less than 12 months of cash remaining AND you expect to be burning cash in the near term, you will need to raise capital immediately despite the market turbulence. If you can raise capital but at a flat or down round valuation, take the dilution hit. The impact of down rounds can be mitigated; the impact of an insolvent company cannot. If you cannot raise any capital, then of course you have no choice but to cut your burn immediately so that you can survive over the next 18–24 months. Cutting costs drastically usually takes significant cash resources, typically 3–6 months’ worth and so factor that into your runway calculations.

4. Ensure your business generates positive unit economics.

Yup, I know…no shit Sherlock. But I cannot believe how many companies have been funded over the last decade that had no positive unit economics or no prospect of positive unit economics in the near term. For example, I am looking at you…15-minute delivery companies. Ok, so you think you are building Amazon and Netflix…good luck. It is not impossible to eventually build a business with negative unit economics in the short run in the hope of grabbing a market share large enough to enjoy monopolistic pricing, but even look at how Netflix is trying to manage the onslaught of new competitors. It is hard enough to build a profitable business but if you cannot build one with positive gross margins, then build a different business. Scaling a business essentially means generating increasing revenues over a fixed cost structure of a business so that you can become more profitable as you grow your top line even further. It is extraordinarily difficult to do this when you increase your revenues, yet your losses get even steeper. As the saying goes “we lose money on every sale, but make it up in volume” was never intended to be a business model!

5. Review opportunities to reduce your costs.

You will essentially have no choice but to seek to reduce your costs if you have less than 12 months of cash on hand. But, if you have more than 12 months of cash on hand or if you are not burning any cash, it is very good hygiene to do this in any event. For technology-based companies, this usually means reducing headcount. While other costs such as facilities, technology costs, and travel should be reviewed for reasonableness, savings from those costs typically do not make a dent. “Neutron Jack” Welch from GE made famous the practice of annually cutting the bottom 10 percent from his organization. While some thought this practice was unwarranted, there is some merit from culling the organization in good and bad times to ensure it is always lean and mean. When companies grow significantly, there tends to be rushed hiring decisions, hiring based on projects eventually killed, and hiring made to meet growth at all costs mantras. In many cases, hiring too many employees in certain departments of your business leads to decreasing economies of scale. So, you should consider cutting the excess fat headcount in the organization and review opportunities for outsourcing, partnering, or leveraging technology to replace the headcount.

6. Re-evaluate your organic growth strategies to ensure steady, sustainable growth.

Strategy is all about what you don’t do; if you had an endless supply of capital, you would try everything to see what sticks. You need to be far more disciplined in determining the best organic strategies on how to grow your top line in a sustainable and ultimately profitable fashion. Once you have built a viable product, you will need to seek product-market fit in a disciplined manner so you really understand your core target market, why they are buying, and at what price point they will buy it. You will need to really understand how sticky your customers are and be able to extrapolate a customer lifetime value proposition. Then and only then can you feed the pipeline with more capital so that you can eventually move from selling on a 1:1 customer basis to a 1: many customer basis. Too many companies have tried to scale their businesses with significant capital before reaching any of the above milestones. It is not nor really should ever be “growth at all costs” but rather it is sustainable, predictable growth that usually ends up winning in the end. In the words of Jim Collins, in his book Great by Choice, are you a Roald Amundsen or a Robert Scott? (I will let you read the book to figure out which one you want to be).

7. Consider build vs buy vs partner strategies to achieve strategic objectives.

Whether you are building your products, your facilities, or your team, consider whether you should build, buy, or partner to achieve your strategic objectives. Determine what is really core to your business and determine what your key capabilities really are. For example, if your company is very good at product development but you know that you need to expand your feature set either through vertical integration or perhaps you need to identify horizontal complimentary features, do you really need to build it? Given the decreasing valuations of technology businesses, is it better to buy a company for a cheaper price than you can build it? Is it better to just license that technology at a good price and enjoy the flexibility of always partnering with the best-of-breed technologies that are not core to your product offering?

8. Evaluate direct vs indirect sales channel strategies.

As you look to expand the markets to which you are selling, have you evaluated whether you need a direct selling strategy, an indirect sales channel strategy, or perhaps a hybrid of both? Entering new geographic markets with a direct selling strategy can be more lucrative as you get to keep all the profits from the sale, but the risk of failure tends to be much higher, and you tend to end up with significant startup costs. Given the decreasing valuations for companies, does it make sense to acquire companies with perhaps an inferior product but good sales capabilities in those markets? In many cases, companies start off with a distributor arrangement with a third-party company, but once they realize they are strong performers, they might acquire them later. Alternatively, there are a lot of companies that have a great sales force but not enough quality products with good margins to sell to their existing customers. For example, consulting firms, telecommunications firms, financial services firms, etc. might be anxious to expand their product offerings through an indirect channel arrangement, especially in a softening market for their own traditional goods and services.

9. Determine whether you have the right mix, quantity, and quality of talent.

Once you have looked at whether you have excess fat in the organization that requires immediate trimming, you really need to step back and assess your company from an organizational design perspective. Do you have the right span of control in your organization? You certainly do not want too many layers in the organization which tend to bloat costs and slow down the speed and quality of decision making, but you do not also want people overburdened with too many direct reports. We have experienced a war for talent for the past decade, but will the power of employment start to swing back towards the employer if we start to experience a deep recession? If so, is there an opportunity to upgrade your talent now so that you can deepen your bench? Do you have the right number of employees in the right areas to execute your strategy? For example, if you have successfully managed to achieve customer-market fit with your product, are your growth plans focused on adding more product talent instead of perhaps more sales and marketing talent to scale your business?

10. Don’t be a hero.

After a decade of rising markets, the next 18–24 months might become a period of stress and anxiety. But it doesn’t need to be. If you remain focused and use this time of uncertainty to stand back and reflect on how you want your company to look once the market volatility reduces, you will be in great shape. In the meantime, it is critical you remain healthy. You need to remain healthy physically, mentally, and emotionally. This is essential for the sake of all your stakeholders — your employees, customers, and investors — but most importantly, your family and you!

Now, go out and get’em!!

John Ruffolo,

Founder & Managing Partner, Maverix Private Equity