Signing out of account, Standby…
Successful startups are product-led, customer-focused, scrappy and super-competitive. Nothing gets you there faster than building in a downturn. I’ve done it.
The message was written on a tombstone: “RIP Good Times.”
I launched my first company during the Great Recession. AppDynamics had ten employees and a product implementation problem with Netflix, our second customer, when Sequoia Capital released its now famous RIP memo in October 2008. Many early-stage companies around us died off while funding disappeared. I watched as our runway dwindled to just a few months. I was building at a time of mourning.
Fast-forward to 2022, and here we are again — with grave warnings from investors. Call it a “startup recession” or a VC funding drought, but inflation is up and the market is down. However, this doesn’t have to signal demise for the next generation of entrepreneurs. Downturns force founders into fight-or-flight mode. Survivors can emerge even stronger.
AppDynamics thrived and went on to a $3.7 billion acquisition. That was not my only experience with building in a downturn. In July 2020, while the pandemic frightened off institutional and retail investors alike, I launched my cybersecurity company, Traceable.
Doom-and-gloom headlines exaggerate market changes, but history proves success is possible. With that in mind, here are four tips for startup survival:
Related: Lessons for the Young Startup Leader: How to Get Through an Economic Downturn
Over the last decade, easy funding has enabled startups to scale in the absence of revenue. In many cases, promising technologies haven’t translated to products that people will actually pay for. With funding drying up, that luxury is gone.
And that’s a good thing. Now, you’re forced to focus obsessively on what will actually drive revenue and bring in customers. Peripheral concerns, bloated budgets and side projects fade as you fight to stay in the game.
At AppDynamics, that started with honing in on a very specific target customer that desperately needed our service. We went after companies, like Netflix, where application speeds were directly tied to revenue. Then we streamlined our feature set to focus on one problem: helping engineers troubleshoot the root cause of slow software.
This went hand in hand with fanatical attention to customer support. Nearly every day for two months, I drove 90 minutes from our office in San Francisco to Netflix headquarters in Los Gatos to observe our product in their environment and ensure it was delivering value. This focus enabled us to do something difficult back then: extend our runway.
Frothy funding has disappeared, but if you need money, it’s still out there — especially for early-stage companies. Series A valuations may have peaked in 2021, but they remain historically high. Investors have an enormous amount of dry powder sitting on the sidelines waiting to be invested.
Securing investment starts with showing metrics that matter. A growing customer base, strong retention and low burn rates will open the door to funding opportunities. Likewise, it’s not helpful right now to obsess too much about your share price or valuation multiples. Valuations go up and down. What’s important is to raise the capital you need to build your business. Startups able to stay in the game can recoup valuation in subsequent rounds.
There’s a silver lining here, as well. As funding takes longer to secure, there’s more time for due diligence. Startups can seek out value-add VCs who offer mentorship and industry expertise, not just easy money.
When it comes to how to spend that money, be strategic, not ruthless. Look at overhead, and negotiate with vendors who have incentive to bring costs down while everyone reduces spending. Reduce reliance on pricey contractors and agencies, and seek to bring expertise in-house. And then, turn your attention to the most important resource in a downturn: your team.
Related: 5 Tips For a Successful Business In a Recession
Many startups impose hiring freezes during recessions or resort to drastic layoffs. But there’s a fundamental paradox in play here: Without people, you can’t grow.
At the same time, recessions offer a huge recruiting advantage as competitors get skittish or die off. Before Lehman Brothers went under in September 2008, AppDynamics was fighting to fill every role. But afterward, we had our pick of talent. Right now, hard-to-find developers are suddenly available. It’s also easier to attract people from established companies whose stock options and RSUs are underwater.
Now is not the time for secrets or platitudes. Your team can also see the news and knows what’s happening in the market; tell them where the company stands.
I was crystal clear about the metrics needed to make it to our next funding round at AppDynamics. We needed 20-25 new customers to secure our Series B. Knowing that gave everyone a singular mission and a sense of urgency. This wasn’t a hypothetical goal. It was a deadline that was fast approaching.
Ultimately, not everything is harder in a recession. Some things get easier. Indeed, some of the world’s biggest brands are proof that downturns reward innovation. Microsoft, WhatsApp, Venmo, Instagram and Uber lived out their formative years during recessions.
Related: How To Succeed As a Startup in a Slow Economy
In the end, market slumps remove distractions, magnifying problems begging for immediate solutions. Smart companies can and do adapt — focusing ruthlessly on product-market fit, finding funds, scooping up critical talent and building a battle-hardened culture. This will be a test, but for founders who persevere, history is on your side.
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