3 Practical Financial Tips for Managing B2B Startups During a Crisis
Startups are never easy. But in the last decade – and especially during the ‘Covid boom’ of 2020-2021 – money was less of an issue. With near endless flows of capital into private markets and a booming stock market, founders had access to unprecedented amounts of cash. Record early rounds came thick and fast. Companies needed to justify monster fundraises with a growth-at-all-costs mentality.
At the tail end of 2022, this is no longer the case. The mood in the markets is decidedly gloomy, and news headlines are no longer dominated by massive Series A rounds.
How should entrepreneurs and CFOs respond to this unfamiliar state of affairs? In the next paragraphs, we’ll try to offer our perspective on the steps you can take to navigate stormy financial waters. Our focus will be on the type of companies Team8 funds and builds – cybersecurity, data, fintech, and digital health startups.
Cause for Concern
While all crises come to an end, it’s important to understand that this one might not be fleeting…
There are structural reasons for rising inflation – supply chain woes, years of money printing and governmental debt, and some geopolitical turbulence. These problems will eventually be solved – but until then, things might be tricky.
In response to inflation, the Federal Reserve and other central banks have been hiking interest rates. And Jerome Powell’s most recent announcement in early November indicated that this will continue to be the direction of travel.
Coming to Terms With a Tighter Economic Landscape
Consumer spending is expected to tighten, borrowing costs are rising, and investors are getting spooked. Markets will likely cool down – affecting both early and late stage funding rounds.
Demand might also suffer, making it harder to close new enterprise business. Heavyweights like Salesforce are struggling with “sales cycles [that] can get stretched, deals […] inspected by higher levels of management”. Your startup is not likely to be immune.
This isn’t the end of the world, but many companies will have to recalibrate. Profitability and unit economic metrics are in vogue again, after having fallen by the wayside for the last few years. Startups are looking to get smarter about their budgeting decisions – whether it’s cloud costs or sales and marketing spend.
All these steps make sense. What other, less obvious changes can B2B startups make to survive and thrive in these less cheerful times?
Tip #1: Don’t Let a Good Crisis go to Waste
It’s become a bit trite to repeat how some of the world’s greatest companies were formed during previous recessions. But even established companies can use this time to make some much-needed changes.
When times are tough, it can be easier to make hard decisions – which we naturally tend to postpone during the good times. This includes:
- Having the right people on your team – and only the right people. Recent years have been characterized by a tendency to hire at all costs – perhaps hoping to justify high valuations through ballooning headcount that will create growth. Now that things are cooling down, it might be a time to regain some sanity when it comes to hiring. This means being more thoughtful about new hires, not compromising on culture fit, and only hiring the people who can make an outsized impact on every level.
- Become KPI-driven in practice, rather than theory. In 2022, everyone already has KPIs they supposedly swear by. But the reality is that many vanity metrics tend to slip into quarterly plans, and missed targets are glossed over or explained away. Now is a chance to become more ruthless – both in choosing KPIs that are tied to your day-to-day operations and profitability, and in being laser-focused on meeting these KPIs every month, quarter, and year.
- Leverage work from home to reduce real-estate costs. While most companies are currently leaning more towards hybrid models over fully-remote, you can still use flexible working policies to reduce office space or set up shop in less central locations.
Tip #2: Be Strategic About Cash
Over the last decade, young entrepreneurs have operated in a reality of zero percent interest rate. Recent rate hikes mean they have to adopt a new mindset when it comes to cash.
- Burn rate: When money is more expensive and difficult to come by, a high burn rate becomes an existential risk. The implicit assumption that the next big fundraise is just around the corner can no longer be relied on. It feels almost silly to say, but it’s time to think like a business and get really concerned when there’s no clear path to profitability.
- Money in the bank is an asset. Many startups have raised millions of dollars that they’ve not touched yet. With rising interest rates, this money could generate interest through zero-risk investments. Simply put – if you have a big pile of cash, there are circumstances where keeping it in the bank might be prudent.
- Hedge against currency volatility. B2B startups are typically global businesses that work with multiple currencies. As demonstrated by the recent crash of both the Pound Sterling and the Euro, exchange rates are likely to fluctuate in coming months and maybe even years. CFOs should hedge their holdings to protect their business against this volatility.
Tip #3: Your Investors Matter – Choose Them Wisely, and Keep Them in the Loop
Partnering with the right investors never stopped mattering. But when VC money was everywhere, it was easy to get blindsided by frothy valuations and lose track of what matters. Now that push has come to shove, the implications of having the right people on your Board or as your intimate advisors- are much clearer.
If you’ve gone with the right VC team, you’ll have access to seasoned people – those who saw the Dotcom bubble burst and the 2008 crisis. They will be able to offer advice and help you understand a world you might not be familiar with. If you’re facing tough decisions such as down rounds, layoffs, and loans, you should surface them to your investors. They are there to guide you through these murky waters.
And if you’re fundraising, you should treat the concept of ‘value add investment’ as more than lip service. You should be very mindful about choosing partners. Do they understand your particular market well enough? Do they have a logical thesis for how it will be impacted by macro tailwinds? Would you trust their advice on decisions that might mean the life or death of your company? These are the questions you should be asking yourself.
Coming Out Stronger on the Other Side
To end on an optimistic note: technology will continue to play a major part in the global economy. Innovative software, digital transformation, big data, and cybersecurity aren’t going anywhere.
Companies that are built on a strong product and go-to-market foundation will survive and thrive – despite challenging times ahead. Being smart about your finances now will ensure you can continue to build a generational company in years to come.