For Founders

The Early Startup Founders Guide to Weathering the Recession

Indus Khaitan, Founder and CEO at Quolum, shares his experience working through recessions and his six core strategies for coming out on top. 

7
 min read
Published: 
August 4, 2022
NAVIGATION
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Note: If you’re an early-stage founder anywhere from pre-idea through pre-seed, consider applying to On Deck Founders

Note: This article is adapted from a live discussion for the On Deck community featuring On Deck alums Ming Lu and Vik Duggal. If you’re an early-stage founder, angel investor, or exec interested in joining our community, consider applying to one of our programs - you’ll be in great company.

Note: If you’re an early-stage founder anywhere from pre-idea through pre-seed, consider applying to On Deck Founders.

Note: This article is adapted from a live discussion for the On Deck community featuring Josefin Graebe. If you’re an early-stage founder, scaling founder, or senior exec interested in joining our community, consider applying to one of our programs.

Indus Khaitan is an experienced tech entrepreneur who has worked in the startup realm for nearly two decades. Formerly a Senior Director at Oracle and an Advisor at Sequoia Capital, he is now the founder of Quolum, a company which helps firms save money on SaaS contracts and costs. In this guide, Indus shares his six key tips for weathering a recession. 

Many startups grow and thrive during an economic boom, but what happens if the economy fails? While a recession may challenge small companies, it doesn’t mean your business is toast. If you’re a young entrepreneur working at your first startup, you might feel that this is the first and worst recession ever. However, that can’t be further from the truth. We’ve been weathering multiple recessions over the past hundred years and the economy has only grown stronger after each recovery. 

Assuming a worst-case scenario of two years, you will need enough buffer to get to the other side. I worked for a startup that went through both the dot-com bubble and the housing bubble; the six steps below are my core mantra that allowed me to survive and thrive during those difficult times. 

Raise money

Raising money during a recession isn’t easy, so I made this simple two-by-two quadrant to help early startups determine whether or not to raise money depending on whether they’ve raised their Series A yet and whether or not they’ve found product-market fit. 

Use this quadrant to discern if raising money is the correct next step for you, or if it will be a slog. Money will be tight among venture capitalists for at least six months as investors wait to see where the economy is going; they want to see a bottom emerge before they return to investing. 

What I’m doing for my startup now is having a preliminary conversation with my current investors and asking: What if the recession extends beyond that two-year timeframe? How can you give me a few more million dollars from the last round that closed? Can I extend my runway with the same valuation of the past?

The goal of asking these questions is to survive. You can figure out an ideal valuation at a later round. 

Increase and preserve revenue

How do you increase your company’s revenue in an economic downturn? Here are three tactics you can employ: 

  1. Chase your current sales pipeline with super-high urgency. Despite the recession, customers are still buying. You probably still have some leads in the pipeline; do what you can to improve your conversion rate from prospect to customer. 
  2. Upsell or cross-sell into existing accounts. If your current customers are super happy, why not sell them on your newer features or upsell them into a higher tier? Watch their product usage, make targeted recommendations, and help them convert. 
  3. Focus on new geographies. The U.S. economy is softening, but technology is expanding into new geographies like India, Asia, Africa, and the Middle East. Figure out if you could enter newer areas to help you survive for the next few years. 

Aside from increasing revenue, you should take necessary steps to preserve your current revenue. 

  1. Get longer commitments. Make your customer contracts longer term, like twenty-four months instead of twelve. Give them a discount, a better set of features, extra parks, and unlimited support to encourage them to stay with you for the long run. 
  2. Control voluntary churn. Improve your cancellation flows and incorporate discounts, upgrades, and other perks to keep your key customers with you.
  3. Dig into payment failures. The industry average for payment failures is 10% for small businesses. Dig into these payment failures and find out if you can reclaim a substantial portion of that revenue through a dunning program. 
  4. Monitor product usage. Get your customer success team to monitor product usage. It’s crucial to know if a cohort of customers is not using your product, because guess what? They are going to churn next quarter. Monitoring usage lets you plan and execute proactive interventions. 

The seven tactics above should give you a headstart in increasing and preserving revenue in the coming years. 

Improve your unit economics

Improving your unit economics means improving your customer acquisition cost (CAC) and reducing spend on performance marketing. 

Guarav Munjal’s Twitter

Guarav Munjal is a very well-known founder. In a tweet about performance marketing, he essentially said that he reduced his ad spend from three million dollars a month to closer to three hundred thousand, and it had no impact on revenue. 

Of course, you have to be judicious about cutting your performance marketing spend. Experiment; see if your revenue dips after moving your spend down a few notches. Keep optimizing further. 

Reduce expenses

When it comes to surviving a recession, you have to reduce expenses. Often, founders start with layoffs but there are other ways a company can cut costs. I think layoffs are the last thing you should do as workforce trimming leaves a long-term scar. 

You could rethink remote work, for example. Having multiple offices spread across cities can become expensive, and salaries in different geographies have gone through the roof. In a similar vein, consider hiring in up-and-coming areas, like Central America, where pay expectations are more amenable. Explore a new location and invest in the talent there. 

A lot of companies can also save money by digging into their spend on sales, marketing, R&D, events, travel, etcetera. I’ve organized the quadrant below based on cost savings and impact on employee morale. I highly recommend not taking away things like free food. It’s a recipe for disaster; it will take your employee morale to the ground and make it challenging for you to recover. Take away one big thing before you take away all the little things that make employees happy. 

Another thing that is very well known in the industry is that AWS and cloud spend can get out of control. Monitor your AWS and cloud costs like a hawk; there are tools that will help you optimize your cloud infrastructure and apply spend controls, and you can recycle those cost savings back into your bottom line.

You can also audit your SaaS stack to see if you have any redundant tools or tools that no one has used in a while. Do you have both Confluence and Notion? Jira and Linear? Many CFOs are shocked when they find these things and realize they’ve been wasting money for the last year. Watch your renewals and ensure each one receives the necessary approvals, and put in place policies about canceling licenses that go unused. 

My personal advice is that layoffs are your last resort, but if you absolutely cannot do anything else, plan them so they’re implemented responsibly and well.

Make savings a KPI

See if you can build a culture of savings at your company. Although it’s very hard, you cannot have a growth-at-all-costs mindset anymore. This cultural shift doesn’t happen overnight, though. Start having discussions with your team and tell them that we’re going through a rough patch and ask for ideas on cost savings. Communicate heavily about what’s happening in the market. 

I do that in my town hall every week so my team and I are on the same page. I also set a savings KPI and assign my CFO or another team member as an owner. You shouldn’t necessarily disclose your savings to the wider team, but your company should know that you’re tracking them. 

This KPI also improves your path towards profitability. It’s a metric that can be brought to board meetings and help position you as a founder who cares about savings and wants to ride out what's happening in the market today. 

Be optimistic

Lastly, you’re going to survive a recession through plain-old optimism. Technology spending is not going down. If you look at this chart from Gartner, every segment is going up twenty to thirty percent year-over-year. 

Even in downturns, technology spending is trending up. It’s a four trillion dollar industry today and it will keep increasing year-over-year. That’s the kind of contribution we, tech entrepreneurs, make to the buying ecosystem, and it will help us survive for two years while finding new customers, increasing and preserving revenue, and continually building for the future. 

This recession is likely just a two-year blip, so continue to build and buy. Focus on the signal, not the noise, and we’ll all get through this downturn

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