Lean startup methods for Startups on how to grow during a downturn
January 12, 2023
CEO | MEHRHOFF DIGITAL
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As the economy continues to shrink, many start-ups are feeling the pinch. To extend their lifespan and stay afloat, they are advised by their VCs, Investors and Advisors to cut their expenses drastically. The marketing and sales departments have to work harder to attract new customers. So what is the best lean marketing strategy to reach customers in this climate?
1. Stop spending money on marketing and sales activities with no immediate or short-term ROI.
2. Refrain from marketing strategies that make you feel good but do not bring any real profit (such as sponsoring elaborate events or product launches).
3. Make sure your current customers are happy with your product and get the most out of it to reduce churn.
4. Invest in low-cost activities with long-term ROI, such as improving your website's conversion rates and search engine optimisation, more robust positioning and messaging. Writing thought leadership articles and blog posts.
5. Empower your employees to do personal branding and marketing for your company by sharing your social media posts with individual quotes.
Navigate a recession and economic turmoil in your favour
Start-ups across the globe are feeling the pressure to make drastic changes to their business models. In response, Y Combinator, a well-known Silicon Valley start-up accelerator, is urging its portfolio companies to take precautions.
YC suggests that start-ups focus on cutting expenses and extending their runway within the next 30 days. The firm recommends raising additional funds for those who don't have the financial cushion to weather tough times.
"If you plan to raise money in the next 6-12 months, you might be raising at the peak of the downturn. Remember that your chances of success are very low even if your company is doing well. We recommend you change your plan", YC told their portfolio companies.
Given the current economic climate, start-ups must take precautions and plan for the worst. By taking some simple steps now, start-ups can help ensure their continued success even during difficult times.
YC's note to back hundreds of young start-ups yearly shows that current market value slashes for tech giants, including Meta and Amazon, are trickling down to early-stage start-up universes.
You can read the email in its entirety below.
Greetings, YC Founders,
During this week, we've done office hours with a large number of YC companies. They asked whether they should change their plans around spending, runway, hiring, and funding rounds based on the current state of public markets. We've told them that economic downturns often become enormous opportunities for the founders, who quickly change their mindset, plan, and ensure their company survives.
Here are some thoughts to consider when making your plans:
No one can predict how bad the economy will get, but things don't look good.
The safe move is to plan for the worst. If the current situation is as bad as the last two economic downturns, the best way to prepare is to cut costs and extend your runway within the next 30 days. Your goal should be to get to Default Alive.
If you need more runway to reach default alive and your existing investors or new investors are willing to give you more money right now (even on the same terms as your last round), you should strongly consider taking it.
Regardless of your ability to fundraise, it's your responsibility to ensure your company will survive if you cannot raise money for the next 24 months.
Understand that tech companies' poor public market performance significantly impacts VC investing. VCs will have a more challenging time raising money, and their LPs will expect more investment discipline.
As a result, during economic downturns, even the top-tier VC funds with a lot of money slow down their deployment of capital (lesser funds often stop investing or die). This causes less competition between funds for deals, resulting in lower valuations, smaller round sizes, and many fewer deals completed. In these situations, investors also reserve more capital to backstop their best-performing companies, reducing the number of new financings. This slowdown will have a disproportionate impact on international companies, asset-heavy companies, low-margin companies, hardtech, and other companies with high burn and a long time to revenue.
Note that the number of meetings investors take stays the same in proportion to the reduction in total investment. It's easy to be fooled into thinking a fund is actively investing when it is not.
For those of you who have started your company within the last five years, question what you believe to be the typical fundraising environment. Your fundraising experience needs to be more every day, and the future will be much more difficult.
If you are post-Series A and pre-product market fit, expect another round to happen when you have hit product market fit. If you are pre-series A, the Series A Milestones we publish here might need to be higher.
If you plan to raise money in the next 6-12 months, you might grow at the downturn's peak. Remember that your chances of success are meagre even if your company is doing well. We recommend you change your plan.
Remember that many of your competitors will not plan well, maintain high burn, and only figure out they are screwed when they try to raise their next round. You can often pick up significant market share in an economic downturn by staying alive.
For more thoughts, watch this video we've created:
The founders of Craft Ventures recently held a meeting, which you can watch on YouTube, and their predictions are rather sobering. It's definitely worth watching the whole thing, but here are some highlights.
In order to survive a potential default, Craft Ventures recommend that you slash spending (including implementing significant layoffs) and extend your cash runway to two years or more.
In times of economic downturn, focusing your marketing efforts on tactics that bring immediate results is essential. Cut back on spending on sales and marketing initiatives that cannot be directly linked to a short-term ROI. This will depend on the industry and the individual company, but some examples could be:
Focusing on activities that generate revenue rather than simply providing emotional satisfaction is essential. Hosting a live event or attending a conference might be enjoyable, but ensuring that these activities will lead to increased sales is more critical. Therefore, you should reconsider that Sales roadshow event in London or Paris.
Visionaries in bull markets, operational excellence in bear markets
In today's business climate, having a well-run operation with a tight capital allocation is more critical than ever. More than a grand vision or big ideas are required - they must be backed up with the ability to execute excellently. A high valuation means nothing unless you can maintain growth while keeping burn rates reasonable.
Businesses can no longer afford to waste time and money on activities that don't generate leads. Every marketing activity must be efficient to maximise conversions and short-time ROI.
Be honest about which marketing tactics are working and which aren't. Take the time to question everything, and host an audit session to figure out what should be started, stopped, and continued. Remember that what made sense last quarter might not make sense now, and reviewing and redirecting is okay. With a clear understanding of the "why", your team will be able to solve the "what" and "how".
Productivity only sometimes means what we think it does
The work that requires the most effort often has the most significant impact. People usually prefer tasks that require little effort but have a considerable effect; however, constantly picking the low-hanging fruit will lead to stunted growth. Once the product and team mature, this work will quickly dry up. Most start-ups are smart enough to avoid projects requiring much effort with little return.
The low-effort, low-impact work can hurt you because it's so tempting. Hunter refers to this as "snacking". It can feel rewarding and solve a short-term problem, but you're only hurting yourself in the long run without making substantial progress.
It's easy to justify doing work that isn't impactful because it doesn't take much time. And even when the work is of little importance, it's easy to excuse because "we took so little time". That's not a strategy - that's flightiness. Do this often enough, and you will build a low-impact team that achieves nothing.
A competent team with a clear plan is more likely to succeed than a team rushing to copy the latest trend. Low-impact work may seem easy and harmless, but it will negatively impact your team's ability to achieve its goals. When choosing projects, focus on those that will have the most impact.
Understand your start-up metrics
Running a business is all about understanding and keeping track of critical metrics. From cash burn rate to customer acquisition cost (CAC) and churn, knowing these numbers gives you powerful insights into how your marketing campaigns are performing. But it's often the tiny details that make the most significant difference. Strong operational fundamentals are crucial to success.
Invest in thought leadership
Many low-cost activities can generate short and long-term ROI. Reputation building through thought leadership articles and blog posts on your website while distributing on social media and giving talks are great examples. These tactics will improve your SEO, brand awareness and trust.
Make sure that the content you create is widely distributed. It is not enough to publish a blog post and post it once on social media. For best results, split the content and share it frequently.
As a leader, it's vital to balance supporting your team while being honest about the situation.
In tough economic times, staying focused at work and doing your best is essential. Make sure your team knows times are tough, and they need to focus and work hard. Set clear goals and incentives, and reward them accordingly.
Recessions are a difficult time for everyone, both professionally and personally. Talk to your team regularly to see how they are doing. Some may have family members who have lost their jobs, which can be very stressful and affect job performance. Allow your team members to have 1:1 conversations about what's happening outside their primary tasks.
Team meetings are a great way to build trust, coordinate, and gather energy for the tasks ahead. And they can be cheap! Time spent together over breakfast, brainstorming with pen and paper, or doing some sports is beneficial for relationships.
Differentiate yourself by being innovative and taking risks by being aggressive while you can afford them.
As the world economy reeled from the effects of COVID-19 in 2020, many businesses were forced to cut back on spending. But while others were scaling down their operations, one entrepreneur saw an opportunity to capitalise on the situation.
When it became evident that the pandemic would significantly impact the economy, I decided to take advantage of it. I had some time on my hands, so I used it to work on founding my agency and started momentum to build a pipeline with potential customers. These prospects were amazed by my past work results, competing with the most significant financial institutions while having severely less capital but still outperforming them digitally on specific search queries and traffic sources.
The best time to invest in your business is when competitors are half-heartedly trying new strategies. You should take advantage of this vulnerability as they lay people off and cut back on advertising spending. By hiring top talent that recently lost jobs or bidding for keywords at reduced rates than usual so even more money can go towards growth initiatives like content hubs!
Read more on how to use a recession to your advantage here.