It’s pretty clear at this point that things are going to get a lot worse in the weeks and months to come before they get any better. The number of COVID-19 cases is accelerating worldwide. Travel restrictions have gone into effect as countries around the world close their borders to curb the spread of the virus. The S&P 500 is down 30% from its peak a month ago and the Dow plunged 3,000 points on Monday alone. Morgan Stanley is now viewing a global recession as their “base case” with an implied $360B loss to US GDP.
As if all that wasn’t enough, some of the yoy OpenTable data coming in is absolutely terrifying with respect to the broader implications we will soon see in the macro economic data. The downturn ahead of us will impact many sectors and millions of households in the US.
Restructuring & Transformation in a Recession
As I’ve spent much of the past week discussing what this all means with founders in and outside of our portfolio, I find myself thinking a lot about my time in the consulting world. During that time, I had the fortune (or misfortune!) of working on a handful of projects involving companies that had fallen into hard times and required what we called “Restructuring and Transformation Services (RTS).” Regardless of the specific situation, in all of these cases, we would follow a very basic framework designed to diagnose and then triage the (mostly) cost-cutting work from “least painful” to “most painful.”
If you are a founder/CEO finding yourself in a situation in the months ahead where you need to go through a restructuring/ transformation exercise, hopefully this basic framework can help you think through what to do and how to do it.
1. Establish dedicated owners: The first thing to understand about any transformation effort is that you have to have clear ownership. In my consulting years, we would always start by working with the client to set up a “Transformation Office” led by a Chief Transformation Officer. The “TO” would lead the effort, create urgency and drive action. As a startup CEO, the buck stops with you. But it’s a good idea to create a small, cross-functional task-force to serve as an advisory council and to drive change within the organization. These people will be working on the transformation while also doing their full-time job so important to pick people who have the capacity and commitment to the company to wear multiple hats through a difficult patch.
2. Diagnose the problem: The next step is to figure out where you stand, particularly from a cash perspective. Some basic questions to ask and get clear on before you jump into problem solving:
- How much runway do you currently have? Did you plan for a fundraise in the next 3–6 months? Were there big customers that were at the finish line or moving from POC to further implementation? Be honest with yourself about where those conversations are now headed and what the timelines will now look like.
- Update your forecast with a new “COVID-19 discount” to the original growth plan. You can start with a tool like this to help understand top-line growth but will need to build in your own view on the P&L and, ultimately, cash position. At minimum you should assume 50% less growth and it would be prudent to plan for a base case scenario far worse than that (e.g. 0% growth or even negative growth if there is significant churn.)
- Call each of your investors 1 by 1 and understand their stance on supporting you through this time. Do they have the ability to bridge you or not? How much are they reserving for follow-on? Realize that each firm is different in terms of how they plan for successive rounds and many investors may be in a tough spot themselves during this time (as are their LPs). But getting clarity up-front here is necessary.
- Look at each of the functions as a % of revenue (e.g. marketing as a % of revenue, sales as a % of revenue, R&D as % of revenue.) Do some quick base-lining using resources out there like this or ask your investors if they have any internal data cross-portfolio. Figure out where you might be lop-sided and what trade-offs you are willing to make to growth vs product roadmap vs culture/ morale. This will give you a sense of the levers you have to play with in later phases of this effort.
- By this point you should have a good sense of current runway and, at a high-level, what levers you have to pull to extend runway.
3. Establish the target: After you have diagnosed the problem, determined your cash position/ runway and understand at a high level what levers you have to pull, you now have a “Baseline” to work from. It’s now time to establish the “Target” for cost-take-out. This is the total cost you need to remove from the business to get to a certain “cash-inflection” point (i.e. a new injection of cash via fund raise or getting to break-even.) This target now forms the basis for all actions you put into motion. The target should be a specific number with very clear milestones (ie. mini-targets) that you can work towards achieving.
4. Create a cadence and review process: It is important that the transformation task force you meet with gets into a regular cadence (this means meeting weekly and if the situation is dire enough, daily.) Get in the habit of tracking all transformation initiatives using a project management tool. During my consulting days, we used Wave. But you can use Asana, Trello, Monday or another project-management tool of your choice. The important thing is to ensure that the tool can track initiatives, owners, progress and tie to real outcomes in the P&L. The transformation task force should regularly review progress using the tool’s dashboards and elevate the most important decisions to you, as the founder/CEO, to ultimately make.
5. Focus first on non-personnel costs: When hunting for cost-take-out, the easiest place to start with is non-personnel costs. Here are a few areas to look into — remember any savings here could well mean one less RIF:
- T&E: COVID-19 has made this an easy one on the travel side but worth looking into any other spend in this bucket (e.g. planned company off-sites, conferences and trade-shows, entertainment budget for large enterprise deal-making, etc.) Almost all of this can be reduced, canceled or postponed.
- Real-estate: if you were planning on decreasing footprint or moving to lower cost locations, now is a great time to pull the trigger on those plans. Worth talking to landlords and co-working spaces to see what relief you can get on space that is not being used for the foreseeable future. Take a look at the utility bill too…it should be going down when everyone is in WFH mode.
- Software & applications: Good time to take stock of all those applications and tools you are using. Which ones do you really need? Which ones are necessary in the WFH environment? Which ones can you part with or, at least reduce the number of seats?
- 3rd party providers: Do a full review of all consultants, agencies and other professional services. What is essential? What can you let go? What can you move to lower cost providers like Upwork?
- Marketing: Budget in certain marketing categories likely needs to go. The targeted, personalized, high-ROI items should stay but anything that does not have clear ROI will be harder to justify.
6. Be thoughtful about personnel costs: For obvious reasons, things get tricky once you start tapping the personnel-cost bucket; exploring RIFs should be a “last resort.” Once it becomes clear lay-offs are coming, morale tends to slip as does productivity. This is particularly difficult at a startup where things tend to be smaller and feel more personal. Some general tips:
- See if you can move people into contract work. A reduction in income is better than no income at all and contract work can help continue to move the ball forward for your company.
- If the rough patch is relatively short term (ie line of sight to a cash injection), offer employees a furlough option but be realistic about the potential timeline for re-hire.
- Be very clear with supervisors/ managers about how RIFs are communicated and messaged when they start happening. Consistency in messaging and empathy in delivery is critical. This will be a high stress time for many so be prepared for some challenging conversations and lots of emotional strain.
- Be careful about how you are thinking about organizational structure. A spans and layers analysis can help identify areas of opportunity. Aim to maintain ~8:1 ratio on the “span” side and don’t remove more than 1 managerial layer within a function or BU or you risk destabilizing that part of the org.
- Don’t assume your top employees will be thankful to have a job and just stick around. Some will flee for more stable environments outside the startup world. Hold 1:1 meetings with everyone and communicate your commitment to star performers. Highlight the opportunities to take on more responsibility and consider granting more stock in the absence of cash for bonuses / salary increases.
7. Remember the good times will come back: Keep in mind that recessions are temporary and your short-term goal as founder/CEO right now is to “just survive.” But eventually things will pick back up. Customers will return and the momentum will swing back in your favor. When this happens, you will want to be in a position to seize the moment and bounce back in full strength. Having a bit of foresight to “see around the corner” and prepare for that moment will help you return in full force.
Additional Resources by Topic
In the last few weeks, there have been some really great resources that have come out on topics related to the coronavirus, navigating the pending recession and how to move forward during these difficult times as a founder. Below is an aggregated list of resources worth reading by topic.
General Coronavirus (COVID-19)Information
- Latest dashboard on COVID-19 reported cases (Johns Hopkins)
- Coronavirus guide and latest updates (Center for Disease Control and Prevention)
- Why outbreaks like coronavirus spread exponentially, and how to “flatten the curve” (Washington Post)
- Coronavirus: Why you must act now (Tomas Pueyo)
HR & People Management Resources
- Lattice COVID-19 Response Protocol (Lattice)
- Stop the Spread — startup leader’s commitment to fight COVID-19 (Ken Chenault & Rachel Carlson)
- A Guide to Managing Your (Newly) Remote Workers (HBR)
- 15 Tips for Working from Home During Coronavirus (Quartet Health)
- Working From Home Without Childcare: We Can Do It! (x.ai)
General Advice on Downturns
- Coronavirus: The Black Swan of 2020 (Sequoia)
- The good SaaS times will end and challenges are coming (Eric Byrne)
- Funding in the Time of Coronavirus (Mark Suster)
- Happy Talk versus Hard Talk (David Sacks)
- A Founder’s Guide to Recession Planning for Startups (Schwark Satyavolu)
- What it was like in ’08-’09, what we can learn for ’20 (Nick Mehta, Jason Lemkin)
Tools for Planning in a Downturn
- Redpoint Growth Rate Estimator (Tomasz Tunguz)
- Operating Expense Benchmarks for SaaS Startups (S&M, R&D, G&A) (Parsa Saljoughian)
Here’s to hoping that this downturn is as short-lived as possible and the roaring ‘20s come back in full force quickly! If you have additional resources I should add to the list above, send them my way and I will make every attempt to keep this list current.