In the next 6-12 months, the amount of cash flowing into your business will likely decrease, possibly by a substantial amount. While external financing can help to bridge cash deficiencies in bull markets, investors are likely to decrease their appetite for new investments, as they did in the past recession, and transition their focus from growth to profitability. Between 2007 and 2009, the number of new investments dropped by over 25% and the total amount invested decreased from $51B to $35B globally. As a result, you should make preparations for surviving without any new financing in the next 6-12 months (see section on Financing in a Downturn coming soon).
Your business may also begin to see weakening customer behavior and less favorable unit economics, if it has not already. Payback periods may double as a result of higher customer acquisition costs and sales cycles will extend, ultimately causing overall sales efficiency to decline by up to 30-50% as measured by new revenue per sales & marketing dollar. As customers’ budgets shrink, they will become harder to acquire, quicker to churn, or may go out of business altogether. Because of these factors, you will likely see lower than anticipated or even negative growth over the next year.
Lastly, your expected cash flow may be lower than originally anticipated due to widespread financial distress. In an environment like this, it is not uncommon to see the amount of bad debt increase substantially, even to 50% of Accounts Receivable. This is especially common for companies with a large amount of signed but not-yet-onboarded customers. We believe it prudent to consider these situations and take steps to address these risks immediately. Depending on your industry, business model, and current cash balance, the next few months could be crucial to your business.
Full In has already helped launch several efforts within our portfolio companies to help them anticipate and prepare for the inevitable changes. We have started by asking them to make reasonable assessments, given their stage and business model, of how key financial metrics will change over the next year. Since most growth drivers will be impacted by a downturn, in order to develop a more realistic picture of expected revenues and costs, you should take a look at how the following scenarios might affect your P&L over the next 1-2 years:
• Number of new customers decreases by 50%
• Upsell drops to 0%
• Churn increases by 10-20% (See our section on Customer Segmentation)
• Overall sales team efficiency decreases by 50%
• Payback period doubles
• Amount of bad debt in Accounts Receivable increases to 50%
Once you’ve gone through the exercise of playing with these various budgetary knobs and understand the various impact levels of each, we encourage you to create three revised budgets based on the following growth patterns:
1. 30% decline in overall revenue
2. Zero growth
3. Modest 25% revenue growth (down from 50+%)
We encourage our portfolio companies to go through this exercise to understand the current state of the business and the various trajectories it could take in the coming months. Given the unprecedented uncertainty in the current economy, we believe any growth-stage business should be prepared for a wide variety of outcomes. Hopefully, this exercise reveals areas of weakness that you can address before they become a tangible threat to your business. For example, you may uncover:
• Near-term cash shortages
• Need to cut general administrative costs
• Inability to execute on planned hires
• Inability to execute on planned expansion opportunities
We feel this exercise can also inform your strategic growth decisions over the coming months as we enter a new economic period. Specifically, you may choose to be more conservative about conserving cash. As recently as two weeks ago, many companies we know were planning or executing on various capital-intensive growth opportunities including geographic expansion, new product investments, new sales teams, or even M&A. Given recent developments, we caution you to evaluate your current progress and to potentially reconsider your previous plans. In most cases, growth is fundamentally costly to undertake. In this case, it could potentially be dangerous or harmful, especially given changing investor appetites.
If necessary, you do have tools at your disposal to cut costs or at the very least, reduce new costs. You may consider a hiring freeze or even repurposing employees into needed roles (see section on Talent coming soon). While you have the luxury of time, consider what positions you could cut if needed as it’s usually better to discuss these decisions ahead of time, instead of waiting for a more stressful and emotional situation. In other areas, you could examine whether suppliers will allow you to push out costs and shorten cash cycles. We have even heard of many companies cutting off office leases in favor of working from home. We certainly have not exhausted the possibilities for reducing costs in this discussion, so please reach out if you have thoughts for us!
We really ARE doing our best to make working with us easy and valuable. Please take a minute to share any thoughts on our vision. Your feedback helped to get us this far - but as the industry evolves so will your needs, and we want to be in front of them!
What are we missing?