“Don’t let a good crisis go to waste”: Essential tips for weathering shocks as a startup

By Professor Colin McLeod, Director, Melbourne Entrepreneurial Centre

Keep on top of your money, keep talking to customers - these are the ways founders can get their startup through the pandemic.

Being an entrepreneur can be a difficult occupation at the best of times. While COVID-19 presents an unusually large challenge for everybody, including entrepreneurs, the reality is that over the life of a new venture, it is inevitable that founders will need to deal with crises.

Some of those crises are internally generated, but there are always externally generated shocks that will present a significant threat to the viability of a venture.

I’ve taken from inspiration from Winston Churchill’s famous quote “Don’t let a good crisis go to waste” to come up with some suggestions that may both help you now, and help you deal with shocks that occur in the future as well.

Who has the right to give away your money?

There’s already plenty of good advice floating around about managing your cash flow, but this was the favourite saying of one of my early career mentors and gets at inadvertently giving people the authority to ‘spend’ your money.

He noted that there are lots of formal systems for giving people authority, but employees informally ‘give away’ your money in lots of ways – like staff who don’t charge for their time and employees who give away free samples. His favourite was meetings: “Just about anyone can call a meeting that costs hundreds of dollars in direct salary costs but they have to get permission to spend $20 on sandwiches for the meeting.”

I was the co-founder of a company that grew rapidly, and it wasn’t until about year four that we went through this exercise and found about 15 ways we had inadvertently given people permission to spend our money. We tackled this as a cultural issue rather than a ‘permission’ issue and made a permanent improvement to the bottom line.

Work with customers

You need to do whatever you can to maintain good relationships with your customers. Their priorities will be changing as quickly as yours. Interestingly, I have read a couple of reports from venture capital in the US that suggest that investors will be looking for ventures that have a nuanced understanding of their market, and in particular, the timing of an upturn – and they are looking for objective evidence, not just your opinion. I think this is pretty good advice, whether you are looking for venture capital or not.

If you are talking to venture capital – or had planned to – don’t stop!

Venture capital will go through its own turmoil during the coronavirus, but this is an industry that traditionally works on 7 to 10-year cycles, so stay involved.

Many VCs report that they spend 70-80% of their time on deal sourcing, so it’s no surprise that there is a considerable body of research that suggests most of the value that VCs provide to their partners is in sourcing high quality deal flow, not post-investment support. A lot of VCs may not be writing cheques today, but they will still be looking to invest in good companies down the track.

By the way, if you do have investors, now is the time to communicate with them more frequently. They will want to know how you are going, and maybe where they can help. One tip – don’t sugar coat, but don’t be brutal. Try to be objectively factual.

Management systems

Over the years, there has been very compelling research about the importance of new ways of operating for new ventures – being lean, being agile, ready to pivot, using the principles of human centred design and more. And we have all heard the familiar lament from VCs to ‘send me a pitch deck – if you send me a business plan, I won’t read it.’

Apart from making the obvious point that the fact that a VC doesn’t want to read your business plan doesn’t mean that they don’t want you to have one, there is ample evidence that business planning works for early stage and high growth companies.

A management system is any formal system of planning and reporting, so it includes strategy, HR, finance, marketing, distribution, sales, product development. My good friend George Foster, who is a professor at the Graduate School of Business at Stanford has been looking at the relationship between the rate of adoption management systems and the success of new ventures for almost 20 years, and the evidence is overwhelming. There is a strong positive relationship between the use of control systems and survival rates, growth rates and valuation of the venture.

In one of his earlier papers, George and his co-authors noted: “In most startup companies adding more systems won’t stifle the entrepreneurial spirit but will sustain growth. Having no systems (chaos) is as damaging to a company as having too many (bureaucracy); and startup companies more often suffer from the former rather than the latter. Their managers tend to worry about avoiding bureaucracy but are blind to the danger of chaos” .1

The companies involved in the first round of this research didn’t have to deal with a global pandemic, but they did have to deal with the GFC, and George and his co-authors found virtually identical results in multinational studies as well as the US.

RIP Good Times

Some of you might remember this as the title of a well-publicised slide deck put together by Sequoia Capital after the GFC. It’s pretty easy to find on the web and it has lots of valuable lessons, but the one piece of advice that has always stuck in my mind is: “companies that move the quickest survive and recover the best”. So don’t die a death of a thousand cuts. Move quickly and make significant moves, don’t be incremental.

You don’t need me to tell you what a stressful time this is, and there is plenty of pre-coronavirus evidence about the mental health challenges to founders, so this should be your number one priority. As a founder, you need to be ready to lead.

Fortunately, some of my colleagues at the University of Melbourne have put together an extensive list of strategies and resources to help people deal with stress and anxiety.

The last thing I would add is that we can certainly learn from previous shocks, but there’s a lot that new ventures can learn from their experience with COVID-19 that will help prepare their businesses for the future. And as we know, a willingness to learn and adaptiveness to changing circumstances have long been identified as characteristics of successful entrepreneurs.

1. Davila, A, Foster, G and Jia, N. “Building sustainable high-growth startup companies: Management systems as an accelerator.” California Management Review 52.3 (2010): 79-105.

This article was originally published on Anthill.