086: Dealing with Economic Downturns
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Nothing puts an business on edge like an economic downturn. Today we’re going to give you some advice on how to keep your business going through a rough time. Every business has to find it’s own way to survive, whether that be returning money, cutting budgets, or cutting your staff.
Now making cuts suck, but they have to be done. The key to surviving is diversify your client list and keep an eye on your revenue numbers. Downturns don’t have to be a time of stunted growth. As a matter of fact many successful companies have used downturns to pull in great talent that had been let go from other companies.
Other topics we talk about are:
- How the economy has seasons
- Why you can’t time “the best time for business”
- The importance of making drastic changes in drastic times
- How to go back to basics
The important thing to remember is no matter what the economy is doing you need to make your business work.
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Steli Efti: Hey, everyone. This is Steli Efti.
Hiten Shah: And Hiten Shah.
Steli Efti: And in today’s episode of The Startup Chat, we’re going to talk about how to deal with economic downturns as a startup as an entrepreneur. So, here’s the deal, Hiten. I hear more and more this kind of a growing eco-chamber of people worrying and thinking about this year in specific being a year that’s going to be economically really, really challenging. We see all these “unicorn stumbling” and having real issues and difficulties and firing people and, you know, selling for a lot less than they raised and having all these issues. We hear all the ramblings on like fundraising is probably going to dry up and funding is going to dry up.
We hear about the all economy going down and this year being a shitty year. And it makes a lot of entrepreneurs and founders, you know, stress out. It makes them nervous, makes them wonder what to do and how to react. And I knew that you would probably have a pretty cool common collected attitude towards this, so I’d love to hear your thoughts. If a founder comes to you stressed out about this kind of—the market and the economic downturn and you’re seeing a bunch of this, you’ve seen a bunch of ups and downs over the years, what’s your advice? What’s your approach today when you see someone with these— I mean, how do you think about that?
Hiten Shah: Yeah. I think it’s a very fundamental skill and many folks don’t have it but, you know, if you just hear it, it’s pretty logical which is like just figure out how to survive if you were going to survive. And if you’re not going to survive, figure out how to gracefully get out of it whether it’s an exit or an acqui-hire or even shutting it down gracefully and returning some money if you’re a funded company. And that’s just more on the funded side.
And if you’re a self-funded and all, I just realized that like some things are going to be harder for you. It might actually be harder for you to get customers at some point. Right now, I don’t see that affect you yet, but if you’re self-funded and you’re generally just trying to make a little bit of money, not like hundreds of thousands of dollars a month in the short run while a venture-funded company might feel differently about that.
So, I think you don’t have to operate much differently, but a lot of the venture-funded companies might need to operate quite a bit differently because—and more of like self-funded companies somewhat ironically because they have to manage their cash flow now because there might not be that much more money anytime soon unless they get a ton of traction and have an actual business that should get money.
Steli Efti: Isn’t that a crazy thing when you think about like, hey, you know, when the economy goes down, you might have to act more like a real business, right? You might have to be a lot more—
Hiten Shah: Basically. It’s funny, yeah.
Steli Efti: Right. A lot more economical—well, you can’t—it’s basically also like on a private level scene, you’re probably going to have to find the lifestyle that matches your income like that’s what we’re really seeing is like you’re not going to be able to live on debt, credit card debt. So as a person, you might want to find a way to spend not much more than you’re earning and the equivalent of that is what venture-funded company, a VC-funded company, you might want to start acting like, you know, money doesn’t grow on trees and whatever revenue you can generate is going to be the amount of money that’s, you know, available to you to use and utilize and allocate and spend.
So, it comes back to basics but then, you know, there’s a lot of businesses especially in the valley that relied early days on, you know, the—and we were one of those businesses. We still are to some extent relying on having a customer base that’s heavily focused on other startups, right? Lots of SAAS businesses have—other SAAS businesses’ customers.
Hiten Shah: That’s right.
Steli Efti: I think that’s the most natural thing ever. So, if you are, you know, a SAAS product and you have lots of SAAS customers and a lot of these SAAS customers if they’re venture-funded and they’re in trouble because funding might not come any more as easily, and if they’re not venture-funded, they might be in trouble because of whatever the economy. How do you deal with that?
And this has also been like one of the major reasons why the early 2000s and the first bubble that happened, a lot of companies were in trouble because the majority of their revenue was coming from other companies that were ventured-funded and were having lots of money to spend on advertising or other things. How do you deal with it even as a bootstrap business when majority of your customers is affected economically? It might have less money or more of the type of customers that you have will be out of business this year because the economy is difficult for them. Do you advise these companies to find other customers? Or just to weather the storm because these types of customers will have good times sitting in the future?
Hiten Shah: This is great. You basically want to diversify. So you want to diversify your customer base if you want to, you know, basically ensure survival because you can’t rely on like other start-ups, other SAAS businesses for your revenue for too long. Even in the long run, like that might not be healthy. Growth rate and probably relatively high churn and often cases especially right now when things shut down or, you know, just need to—when everyone needs to reduce budget.
Steli Efti: It’s actually an interesting topic maybe for future episodes to talk about how to diversify your customer base, right? Because a lot of times—most of the advice I give is all about like focus and find who is your ideal customer and get more of those. But then, you know, once a company has lots of those, how do they start thinking about finding more—what’s the best next type of customer? How do you diversify? Your branding, your marketing might be perfect for one audience but not for another.
Hiten Shah: Yeah. We should talk about that.
Steli Efti: We should definitely talk about that. For now, you know, coming back to like how to deal with this, I mean every economic downturn is, you know, a challenge but also an opportunity, right? Let’s talk a little bit about the opportunity side of things. You know as a business that lots of companies will be in trouble. Money will be less available, so it’s going to, you know, create challenges. That means you need to be more probably a bit more frugal and the way you deal with cash and money needs to be a bit more focused.
At the same time, it means that all your competitors and everybody else in this space will also have the same challenges and you might be able to, you know, get through this and win more of their customers or some of your competitors might go out of business totally and it kind of opens up the opportunity for you to take over their customers.
So, some of the best companies always seem to grow specifically well through this economic downturns. They seem to be producing some very iconic companies. How do you think about that, the importance as a business to be good at dealing and managing through tough times as a competitive advantage?
Hiten Shah: Can you say that again?
Steli Efti: Yeah. My point being it seems like a lot of times when there’s big economic downturns that there are certain companies that really step up to the plate and take advantage of that and either crush their competitors or really hire more talent because, you know, downturns also represent opportunity. It means that a lot of their competitors—
Hiten Shah: Oh, yeah.
Steli Efti: –might be in trouble.
Hiten Shah: Yeah, yeah.
Steli Efti: It means that a lot of small businesses are out of business and now you have more talent to hire from [0:07:35][Indiscernible].
Hiten Shah: I mean, look, if you’re—I got something even more dysphasic. If you’re operating a business, it doesn’t matter what the climate is, you have to figure it out. So, you have to treat it as an opportunity. I don’t think you have an option.
Steli Efti: So, what is the opportunity? How do you think about it?
Hiten Shah: I think a lot of the things you mentioned make sense, right? Like hiring people. It should be easier to hire people. People generally will be getting lower salaries as well because the companies that are high-flying paying the most money tend to be the ones that go out of business if they don’t have a healthy business. Most of them don’t have a healthy business, right? Because they got to their scale by venture funding and right or wrong, it doesn’t matter, right? Like that’s— the money was there and they took the money. You know?
Steli Efti: Yeah.
Hiten Shah: And it’s that simple regardless of anything else that you hear about anything. It’s like they took the money because the money was there. And as a founder, a businessman or whatever, businessperson, you want to do that. You want to go, you know, do whatever you can to grow the business. And now, you know, things are different.
And so to me it’s like, yeah, there’s going to be—it should be easier to find great people to join your teams especially if these companies are either shutting down or just start contracting. Some of them already are, right? There’s people on the market from a lot of these companies and because it’s based on budgetary cuts, they tend not to be bad people, right? It’s not like people are getting rid of their bottom 10% of people.
And I don’t mean bad people, I just mean people that you wouldn’t want to talk to because they might be junior or they might be people someone else is letting go, no. These are people getting let go that are very talented people, you know, and that’s what happens when companies contract like this and a lot of them are going to. So I think that’s one of the biggest things.
Outside of that, like there is less noise like there’s going to be less companies out there trying to spend money on marketing channels or trying to spend budget on contact marketing or whatever. There’s going to be some compression of that which allows you to basically stand out from the crowd a lot easier. There’s just less of a crowd.
Steli Efti: Do you think about macroeconomics at all as you’re building your business? Do you ever think, oh, I think we’re in a downturn, we’re in an upturn, the market is going to turn around or not, I think that we’re in a bubble? Do you even—it doesn’t sound like this concerns you a lot. It sounds like a type of thing you really don’t think about too much. Is that correct? Or is that something you still always on your mind or you want to be cognizant of? Like what season in the year are we in? Like because, you know, no matter how independently you think about things, in winter, you’re going to have to act differently than in summer, right? Because there’s some outside forces that will do affect your business no matter how you would like to operate it.
Hiten Shah: Yes. Survival won’t come from raising more money. Survival won’t come from, you know, milking start-ups for their money, you know, whatever that means or even—a lot of small businesses might go out of business too because the people are going to spend less money. So there are certain categories. Every category will be impacted potentially. It’s just to what degree and why.
And I think that no one can really predict this, but the best thing you can do is try to get as much runway as possible and try to get to a point where you’re actually much more focused on money. This is the thing a lot of investors say which is that—and I believe this for self-funded as well. It doesn’t matter. Some of the best companies are created during downturns.
Steli Efti: Right.
Hiten Shah: And that’s a typical thing they say. If you go look at the history, I think it holds true to some extent, if not a great extent. So, yeah, I think it’s a great time. I think opportunity is everywhere, but you can’t get scared of the macroeconomics situation. You just have to focus on that much more on building your business and making sure that it stays alive.
Steli Efti: Yeah. I feel like in that sense as a founder, you need to act like—you cannot try to time the market, right? You can’t wait around for being like is this a good time to start a business? I always find it funny when people like this is the greatest time ever to start a business or this is a really off-time to start a business. It doesn’t fucking matter. You can’t wait around to try to time something for being good or not. If you’re in business, it’s the best time to be in business if you’re thinking about getting into business, it’s the best time getting into business, right?
I mean it’s always going to be the right or the wrong time for certain aspects that you can control for many various variables that are outside your control. And I think they’re trying to worry too much about what’s going on in the world at large is wasted because you have zero impact on that. You can’t influence that. You can’t wait around for something to be perfect or not perfect. You just have to act differently depending on what the season is that you’re in.
Hiten Shah: I love that. I think people don’t think about it like that like we are definitely in winter or getting into winter right now. We’re probably in winter by a lot of, you know— by most standards. And so if we’re in winter, what do you do in winter? Well, you know, you try to stay warm which means basically you’re trying to survive, right? And not freeze to death. And so I think the analogy is great. I love the seasonal thing.
At the end of the day, I want to go back to something you said in the beginning which is how absurd you found this concept of like going back to business basics, right? And profit loss, margin, revenue, things like that, right? Net gross, etc., like just get used to all that terminology and open up your financial documents and go make best friends with someone that understands them if you don’t. That would be my very direct advice.
Regardless of what kind of business you’re running right now. If you’re not on top of that stuff, which I know sounds absurd according to Steli and I think he’s right, but I commonly find that being the basic things. It’s like if you’re worried about what to do or you’re even looking for advice whether it’s from me or Steli or whoever, bring the numbers, which means you should understand them because a lot of clarity comes from just knowing your situation and the numbers are what drive that and that’s why it’s absurd when people don’t go back to basics in these situations or when they’re even not just doing the basic business stuff. Even at a venture-funded business, you’re still losing money even if you’re not making any.
Steli Efti: Yeah. You know, another common theme that I see is that some companies will decide, “Okay, we are potentially in trouble. We might have to change the way we are doing things” and then you can see so clearly the difference between an experienced founder versus an inexperienced founder because a lot of times the way they act in that situation is that the inexperienced founder will go “Oh, shoot, I think the market is going down. I think we’re going to have a difficulty to raise money. We need to change. What’s the least amount of change that we can do that we assume might be enough? Like how can we do as little—like, let’s say, we need to let go of people to save cost, let’s let go of the least amount of people possible that we still feel like maybe this would work versus the very experienced founder will go, “Well, if we need to change, let’s change as hard and drastically as possible.”
Hiten Shah: That’s right.
Steli Efti: Right? Let’s cut all the way close to the bone because I don’t want to keep doing this every few weeks like we need to just—
Hiten Shah: I like that, Steli. God, I like that. It’s like extreme times call for extreme measures, that’s what comes to mind and this is not extreme times but if you don’t think of it extremely, you might get—you might really get burned pretty hard, you know, in these kind of times for sure. I like it.
Steli Efti: I think that, you know, sometimes panic is the appropriate response and I don’t mean panic in the sense that— I just find the quote funny so I’m saying it, but it doesn’t fit perfectly because I don’t mean panic in the sense of like losing your mind.
Hiten Shah: I know.
Steli Efti: But I mean in terms of “now is the time to not act a little, but we need to fucking act and like if we’re doing it, we’re doing it fully.” Because the reason why that’s so important is that if you are right in your assessment with things need to change, then you need to change as quickly and as fundamentally as possible.
Hiten Shah: You know what? This is— like we need to spend some time on this. This is like the number one thing. It’s like once you decide, decide, go and make it happen. And oftentimes, people can’t make the decision in the first place and they live with the indecision.
Steli Efti: Yeah. Or they know they need to do it. They make a decision, but they make the most tentative version of that decision possible. They are going to “Oh, we need to let go of lots and lots of people. We don’t want to let go of lots of people, so let’s just let go of a little people.” Well, then you might as well not let go of anybody like it doesn’t help. If you know that you have to cut cost by 50% or you’re out of business, if you cut it by 5%, you might as well not cut it. It just makes no difference at that point.
But I see that—today you can see in some companies that have very experienced founders and they take very drastic measures, you’re like “Oh, I get it.” They probably take a lot more drastic measures than they think they have to. And why is that important? Number one, if they are right with that they have to take measures, they might as well go all in. But also, it’s hard to manage people during those times. Like you don’t just need to think about like the change, you need to think about how do I keep the team that stays with us focused.
Hiten Shah: Yeah, you have to manage the change. You have to manage the change, not just the people leaving, the people staying and making sure that like, you know, you’re appropriately, you know, communicating because it’s hard, right? It’s actually hard to let go of people.
Steli Efti: Oh, yeah. It sucks.
Hiten Shah: I know.
Steli Efti: It’s one of the hardest things you can do. And now if you let go of a little people and you tell everybody I hope that’s enough and then you have to let go of people again, you fucked. You fucked. Nobody trusts you anymore.
Hiten Shah: They’re not going to believe you again.
Steli Efti: They’re never going to believe you again and rightfully so, and everybody is going to be thinking about their own job and being in fear of it and nobody is going to be productive anymore. But if you say, “Hey, we’re going to take drastic measures but we’re going to weather this storm” and you do it and it’s like one cut that really hurts but afterwards people see that, “Okay, it was one cut and we’re like we’re moving forward and we’re making improvements and we’re making all the changes necessary,” people are going to stop worrying and start focusing again. Everybody is going to line and try to turn this around and that’s absolutely what you need to make a turn around like that happen. It’s impossible to do if everybody is worried about their job like you’re not going to turn around a business if everybody that works in your company is worried about them having a job at the end of the day.
Hiten Shah: Exactly.
Steli Efti: So like—that’s kind of—yeah, that’s such a crucial thing. People are like—I talked to a founder last week that was like didn’t get the funding that was promised to them by an investor. Now that same investor made them another promise which I don’t understand why you would believe it this time, right?
Hiten Shah: Oh, yeah.
Steli Efti: They already broke their promise before.
Hiten Shah: Come on.
Steli Efti: Now they make you a new promise and you’re relying completely on their promise as if it’s the truth and you’re like, “Well, they said that they’re going to fund us if we do X, Y and Z, so you know we still have run rate for 3 months. In this 3 months, I’m going to attempt to do X, Y, Z and then I’m crossing my fingers that that investor is going to give us the money they promised us.” Well, that’s just so hard for me to get behind as a plan on how to act in this situation like—
Okay, what is the investor doesn’t give you that money in 3 months because they’ve already broken their word in the past? They told you in the past they would give you money and they didn’t. So what if that happens again, what’s your plan then? And they’re like “Uh, I don’t know.” Well, you better figure it out right now. You better not wait 3 months and then be caught with your pants down and not know what to do when you have like 2 days of money left in the bank—that just seems—
Again, it’s probably because people in this very challenging situation and then hope kicks in and they try to figure out a version of reality that’s the best version possible and then they hold on to that, and that’s not a smart strategy when you’re in a crisis situation.
Hiten Shah: Yeah, I totally agree.
Steli Efti: All right. Let’s rally this episode up with some tips on how to deal with this. I mean I think a lot of the things we said are already tips one way or another like, hey, manage your cash flow better, hey, when you have to make cuts, make them fully.
Hiten Shah: Yeah.
Steli Efti: Is there anything else that we want people to do now if they are worried about the economy and they’re worried about money drying up and all that?
Hiten Shah: It’s not the end of the world. It’s not the end of the world. You just have to go back to business basics and manage the situation and be objective about it. I think you can get easily emotional about it, right? Thinking that, you know, whether it’s all the way from the extreme of it’s your fault to sort of equivalent of fuck the world, fuck everyone around me. And I think it’s really a time to just like, you know, not let those thoughts get in your head and focus on kind of what needs to be done.
Steli Efti: I love it. I have nothing to add. That’s so great. It’s not the end of the world. No matter what the economy is, go back to basics and focus on what you can impact, what you can influence and, you know, use it as an opportunity, see it as an opportunity.
All right. That’s it from us. We are looking forward to hearing more from you. Make sure to join the Facebook group if you’re not already part of it, thestartupchat.com/fb for Facebook and we will hear you very soon.
Hiten Shah: Bye.
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