This post originally appeared in Forbes, written by Erik Rannala.
Startups are uncertain, high-risk exercises under any circumstance. When investors make available capital, it's possible to mitigate some of that risk by extending runway – in some cases, almost indefinitely.
But markets are cyclical, and in the wake of the COVID-19 outbreak, the venture capital landscape has changed. While many VC firms are still investing – and will throughout this crisis and beyond – the bar to raise capital has undoubtedly gone up.
As an entrepreneur, there’s nothing you can do to control market conditions. But there is something you can control: the way you build your business.
Even in the best economic environment, startups face countless challenges, whether related to hiring, pricing, sales or customer acquisition and retention.
To overcome them, some companies take a capital-light, iterative approach, experimenting until they find tactics that work and then scaling up from there.
Others take a very different path, opting instead to raise and burn through vast amounts of capital. That, however, can lead to what the Startup Genome Project calls ‘premature scaling,’ which is a fancy way of describing when a company spends too much money, too early in its lifecycle.
When investor capital is plentiful, some companies can get away with some overspending here and there – although if they do survive, it often dilutes founders and employees, and compresses investor returns. In today’s economic climate, though, premature scaling can be catastrophic for early-stage companies.
To be clear, premature scaling should not be confused with merely running out of money. On the contrary, sometimes the root cause of this phenomenon is actually having raised too much money.
Indeed, after raising large rounds of financing, founders frequently feel pressure to spend aggressively to drive growth. That pressure can lead to missteps, which most startups can ill-afford when they still haven’t found product-market fit or a scalable, repeatable go-to-market strategy.
Many of you have already heard this message, but it bears repeating: In today’s environment, the number one objective for startups should be survival. While that might sound extreme, given how fluid and unpredictable the current situation is, staying in business supersedes everything else.
What also bears repeating is that if you were lucky enough to have raised capital before VCs became more circumspect, now is the time to preserve it, reduce burn and extend your runway. Avoid the trap of premature scaling at all costs.
Everyone hopes for a swift and orderly return to “normal.” Yet, it’s unclear when that will occur or what it will look like when it does.
Meantime, founders may need to take drastic measures, including executing layoffs or furloughs, reducing salaries, downsizing office space or cutting other significant but non-essential expenses.
Though many have already begun to scale back, others have been slower to act. That’s a mistake. No one relishes making decisions like this, but the key is to act quickly because waiting can jeopardize a company’s survival.
Along with cutting expenses, focus on bringing in revenue. If this wasn’t a top priority before this crisis, it should be now.
Simply put, revenue is the best way to fund your business, especially if investors have pulled back. At the same time, resist the temptation to “buy” topline revenue by spending a lot of money.
If you haven’t proven that product/market fit exists – or at least have a high degree of confidence that it will emerge soon – spending money for the sake of spending money will do little to solve that core problem. What’s true during good times and bad is that customers either want what you are selling or they don’t.
Most importantly, stay focused. During a crisis like this, it’s easy to get distracted. Often things that seem urgent are not as important as you may think.
Concentrate on keeping your team healthy and motivated, cutting burn and driving revenue. In an environment with reduced resources and increased uncertainty, disciplined and focused execution is critical.
And finally, remind yourself that this too shall pass. While not meant to diminish the human toll of this current crisis on millions of people, we must recognize that we can recover and even thrive.
By focusing on the essentials and weathering this storm, companies can do what the survivors of the 2008 financial crisis, the dotcom bust, and other downturns before them did — survive to fight another day.
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