December 3, 2020
We all know what doesn’t kill you makes you stronger — but that doesn’t make going through tough times any easier. Having built several companies throughout my career, I’m no stranger to setbacks and the resilience they demand.
Three milestones in my life have formed my ability to make it through the worst. The first was starting my first venture in 2005 with no outside capital. The second was the 2008 recession, when it became quickly apparent that there’s no safety net for cash when you bootstrap a company. Then, in 2013, my company lost its biggest contract, forcing us to lay people off every single week.
During the current economic crisis, entrepreneurs face a similar challenge. From April through June, the U.S. economy contracted at a 32.9% annual rate, its largest drop on record to date. Countless entrepreneurs, startups, and small businesses are struggling to keep their projects afloat while the economy sinks into recession.
However unprecedented this crisis, there is still every reason to hope we’ll come out stronger on the other side. Here are just a few things you can do now to build a stronger, more resilient company.
When I was laid off from my corporate job in 2005, I knew I wanted to start my own company — but I didn’t know a thing about institutional capital. I operated under the assumption that I’d have to establish a commercially viable revenue-generating company in 18 months — the same length of time I could stretch my severance.
I applied for a Small Business Innovation Research grant. When I didn’t get it, I launched a pilot with a small hospital. Once I had validation for product-market fit, I presented the results at a local conference and landed my first enterprise client. On principle, I was honest with the client about having no money to hire employees and deliver the product from the get-go. As a result, they agreed to prepay for services quarterly, and that’s how I built the company and kept it steady until more paying clients came in.
To keep your ideas afloat when funds are scarce, start by asking potential pilot clients to fund the early market validation and company growth. If your idea has a positive impact on your client’s P&L, they’re likelier to help you succeed. Also reach out to strategic partners about making investments in your startup, structured as a convertible note. These standard documents won’t cost a lot in legal fees and can provide much-needed cash, either before a priced seed or Series A round or even later as bridge financing. And in real scarcity, you can ask your employees to take pay cuts until finances are stronger. Many would rather earn less than lose their jobs.
Getting credit was practically impossible in 2008, so I faced the grim realization that I might not be able to make payroll. Any business owner knows that is an absolute point of crisis.
I was transparent with my team, clients, and vendors about the situation. I knew I’d only be hurting our company as a whole if I kept our financial challenges a secret. Although I was terrified to have a tough money conversation, I had confidence that my team would band together and make it through the crisis.
Finally, I brought the leadership team together and told them, “We are all going to work 80 hours a week and get paid for 30 hours. Otherwise, someone is going home today.” We all made sacrifices for the good of the company until our financial situation improved. These types of uncomfortable but necessary conversations are where good culture and transparency become invaluable tenets of business.
A rainy day fund can be a lifesaver, but 17% of small businesses don’t have enough cash on hand to make it even two months without revenue. The rule of thumb says you should have enough cash in the bank to cover six months of operations to ensure that if an unexpected crisis hits, you’ll have time to react. That’s especially vital when you’re carrying not only your own success and livelihood on your shoulders, but also those of your family, your employees, and their families.
This lesson hit extremely close to home in 2013 when my company, Viridian Health, had a multimillion-dollar contract with the federal government that contributed 60% of our revenue. Knowing that a government shutdown was possible, I called our contract program officer to better understand how the company would be impacted and was assured that it wouldn’t — yet at 5 a.m. the following Monday, I received a stop-work order on the entire project. My world fell apart.
The company didn’t have the funds to lay people off and pay out vacation time. We began to lay off people every Friday. It was horrible. It destroyed the culture and the company’s reputation. As awful as it was, though, these events guided my thinking about cash management, accruing PTO, and corporate structure for my next venture, Solera, which was well-funded by venture capital.
Strategic spending, intentional transparency, and a great corporate culture can weather the inevitable storms of an early-stage startup. Running a company is a long game, and it’s your time investment and commitment to working in the trenches that will determine your ability to weather whatever comes your way.
Originally published on Thrive Global
April 1, 2021
March 15, 2021
November 3, 2020