What A Changing World Means For Your Startup

June 12, 2020



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What A Changing World Means For Your Startup

This is a recap of our March 24th panel discussion with Heidi Roizen (Partner at Threshold Ventures), Bob Tinker (former CEO of MobileIron and Co-Author of Survival to Thrival), and Mahesh Ram (Founding CEO of Solvvy).

Watch the full talk at pear.vc/speakers.

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If you haven’t gotten it into your head by now, you really need to: the world has changed since the outbreak of COVID-19, and the changes are here to stay.

At the end of this month, we’ll finally have the Q2 data we need to get a better sense of exactly how much things have changed, but we expect that the main takeaway from our discussions with Heidi, Bob, and Mahesh will still ring true: we are going to have to unlearn some of the lessons that we’ve learned over the last 7–8 years.

You’ll need to get over what Heidi calls “valuation nostalgia.” That is, looking back at the good times and thinking about the valuation that you could have raised at then. Heidi is blunt about this one:

“‘Okay, but you didn’t, so forget about that,’” Heidi says. “What’s in your control? Well, the only thing you have in control is the cash you already have.”

You’ll need to take a good hard look at that cash and seriously rethink through your operating plan, your sales and customer acquisition strategy, and your team priorities.

Getting yourself ready as the CEO
The growth vs. breakeven ‘slider’ is the founder test of the new decade
Prove yourself a partner to your customers, not just a vendor
Ask your team what you should be doing differently
The power of positivity blends beautifully with the power of urgency

Getting yourself ready as the CEO

Before you dive in and get to work, we at Pear always recommend understanding first principles and getting into the right mindset.

First things first, as a founder, you’ll need to come to terms with the fact that this downturn is not going to be a short run, so you’ll want to make sure you can manage yourself first. Steel your health, attitude, and outlook.

The second key principle to remember, especially in a downturn that has forced everyone to work remotely, is to over-communicateespecially to your three constituencies: your employees, your customers, and your investors.

Finally, remember that the number one job of an early stage CEO is survival.

“It’s not optimization. It’s actually just don’t die,” Bob Tinker reminds us.

The growth vs. breakeven ‘slider’ is the founder test of the new decade

The first question you’ll need to answer is: What’s the impact on my operating plan, and what needs to happen to make sure my business can survive?

“There’s ‘never raise any capital ever again and make money on what you got’ to ‘do nothing and keep doing the same thing you’ve been doing,’ and there’s this infinite slider in between,” says Bob Tinker. “The big question that I was struggling with was: where on this slider do I want to be?”

This is the question where leaders earn their chops. There is usually a tradeoff between growth and being able to break even. Founders who can figure where on the slider to land and avoid burning cash will be able to control their own destinies and make it through the downturn with stronger companies.

No one can give you a precise answer on where you should land. The answer will differ for every company. If you’re a 10 person company, for example, with some seed capital but no revenue, you will probably want to keep your burn rate low, get some product work done, and go find some early customers. But the specifics matter.

Strategies for Modeling

As always, you’ll have to think ahead, work backwards, and play out all the different scenarios to get an understanding of your possible range of outcomes. Make sure the model is dynamic and be conservative with your projections.

“In good times, what you do is think ahead to your next step of milestones to justify raising capital, like x ARR, y customers, z pipeline, b GTM — and you’d say ‘Okay, I’m gonna get there in 6–9 months.’ I think you have to now put that milestone 18 months out,’” says Bob.

For SaaS companies, Bob recommends thinking about your business in two chunks: fixed and variable. The fixed chunk of your business consists of your renewals pool, the cost of serving those renewals, and R&D and G&A. The variable side is your sales and marketing.

“If you look at your renewals times your gross margin, minus R&D and G&A, it tells you: is your core engine generating cash? Then you’ve got this other part, where you can decide how to turn the dial: how much do I want to put in sales and marketing, and what do I get out in terms of new ARR? Which then flows into the renewals bucket next year.”

Mahesh adds that you’ll need to think of your new ARR in two chunks as well: from new logos vs. upsells in your existing customer base. Each category tends to have different operating costs and are served by different parts of the business.

If modeling is not your strong suit, Mahesh recommends you hire a freelancer to help (which wasn’t as easy in ’01 and ’08) — “that’s a better use of $1500 than trying to do it yourself and beating your head against the wall and coming up with something that your investors look at and laugh at.”

Prove yourself a partner to your customers, not just a vendor

After you’ve rethought your plan and have a good sense of what the new world is like for your company, you’ll have to think about the impact of the new world on your customers and prospects.

You will need to go through your customer base and run through a risk categorization process by segment. You will need to convince your customers you’re not just another vendor to slash.

Who are your new stakeholders?

In 2008, Mahesh’s company, LearnBIG, was serving two large industrial customers who were ready with the axe.

“I’m flying to Brussels and Switzerland to meet not with my buyer, but with heads of procurement, who are telling me ‘I don’t care how good you are, how valuable you are. You’re selling HR and talent services. I don’t need that, I’m going to cut that.”

Mahesh knew that he was selling a potentially dispensable item, so it was time to turn the problem around on its head. The team came up with a survey for the procurement teams to discover exactly what each country division was spending on local vendors. They found 260 vendors, who were spending at least 20x what they were spending with Mahesh’s service.

The team then went back and cut a deal with those procurement heads: Mahesh and his team would change their product’s licensing model to an enterprise model so anyone in the company could access the product at the same price — including the procurement teams — as long as they cut the vendors they’d discovered through the survey by 50%. This would save them more money than Mahesh’s program would cost over the next 10 years.

“In a minute, the procurement person who was our enemy suddenly said, ‘Wait a minute, I’m going to go to my boss and I’m going to be able to say how we eliminated 130 vendors with a single stroke of a pen, and I can tell all my countries what to do — a year ago, I couldn’t tell my countries what to do.’”

The point is, in new times, you will need to understand who the new stakeholders are in your customer base — they are likely not your original points of contact or advocates. You’ll need to figure out what you can do to make it easier or less problematic to do business with you.

Go back to the drawing board and cut new deals.

“Negotiations is the art of finding the maximal intersection of mutual need,” says Heidi.

In the 90’s, Heidi’s company had been working on international expansion right when the dotcom crisis hit. They had been negotiating with large computer OEMs at the time, like Acer in Taiwan and another in Korea. It quickly became clear that the company was not going to be able to expand into the Asian countries because of the crisis and a new plan was needed.

“Let’s say our software was selling for $100 a license at that time. We went to them and said, ‘We’re going to give you a country wide license, but you’re going to have to do the translations and the tech support yourself, but you only have to pay us $10/license or $5/license,’’ says Heidi.

“It was a crazy low number, but in the context of the idea, it was sound money. We weren’t going to be able to address those markets in a 1 or 2 year period. For those companies it was a win for them: they had a need for this software. We couldn’t support those markets and we were dealing with big enough companies that could, and so we just cut them the deal of the century.”

The beauty of software businesses is that the cost to produce another software product is pretty much free or near free, and so a short term sweet deal is completely doable. You might be able to reach a setup that allows you to grow in the future and brings cash in the door now, which can be a lifesaver for your business.

The most up to date information is in your pipeline.

When it comes to new logo hunting, you’ll have to go back to the drawing board for your go to market playbook.

“The way customers decide to buy changes. If you keep doing your go-to-market the way you were doing it before, you’re not going to have great results and your economics are going to get even worse,” says Bob.

It’s important to talk to your current customers, but it’s perhaps more important to remember to talk to your prospects, because they can tell you more about the customer mindset shifts that are happening.

“There is a shift in how the customer decides to buy. There are going to be some things that used to work but don’t work anymore, and there are some things that may now work that didn’t work before. So, go look for those value props, those things that drive urgency that weren’t there before.”

Don’t wait until you see an impact to your sales to change your strategy. It will be too late.

“Stay all over our prospects and your pipeline because that’s going to be your early warning indicators in a downturn about what the future holds for you. You gotta get in front of it and be able to see what’s happening inside your pipeline.”

Ask your team what you should be doing differently

While all the planning and fundraising work is important, remember that the true mark of a leader lies in how they bring their team through rough times.

“We can talk about fundraising a lot, but frankly the team and dealing with the team is what everyone is actually doing every day,” Bob reminds us.

You as the founder will need to get your team to a crisis footing, and that comes with helping everyone to ruthlessly prioritize. You are responsible for helping your team get into their heads that the world has changed, and you will need to take near and obvious actions right away.

Don’t lock yourself in a room.

Sometimes, CEO’s think that it is their responsibility to lock themselves in a room and come up with a grand master plan that will save everyone. Don’t do this. Get your team involved. They need to hear from you, and they probably have great ideas.

Ask your team what they think you should be doing differently. What should stay the same? What are you going to do more of? Less of? Work together to come up with your new, revised goals.

“One of the really powerful exercises is to put the new and old set of goals next to each other and say ‘here are our old goals’ and ‘here are our new goals,’ so everyone knows the before and after,” says Bob.

At Solvvy, Mahesh created a Slack ideas channel that has been a wonderful source of new ideas.

“It’s amazing to see, and I gotta tell you, I’m going to look at that channel in two months and I think it’s going to be the best R&D thing I could ever look at!”

On the flip side, you may come to the realization that you’re going to have to make cuts. If you must do this, the advice is unanimous — only do it once. The “drip drip drip” approach is the worst thing you can do. It creates extra anxiety for your team in an already uncertain time and is a serious blow to team morale. Do it once, and do it right.

The power of positivity blends beautifully with the power of urgency

We got this one from Mahesh, but it rings true. All of this advice might sound a little doom and gloom, but we recommend still staying positive! You can understand the urgency while remaining positive.

“If you’ve got an innovative breakthrough thing, chances are your big competitor is not doing a lot of work to beat you. You might have the chance to use this window effectively to create a market and not have someone bigger muscle in!” Mahesh points out.

Bob recounts his years at MobileIron in ’08 and ‘09:

“We put our heads down during the ‘08-‘09 downturn, kept burn rate low, focused on winning product and customers, and one of the great upsides was that there weren’t a bunch of ‘me too’ competitors funded right after us. So when the market turned, we were ready to capitalize on it,” says Bob.

“It was kind of a scary dark 18 months, but man, once when things turned, it was spectacular, and that’s my wish for all of you. This is your chance to really lead, hunker down and be ready when things turn.”