When the energy industry runs into a recession, your startup should be taking market share. Yes, I have heard your excuses that customers are still evaluating your technology (and running you through Proof of Concept HELL). Regardless, you are running out of cash. Whether this is due to missed market timing or your value proposition is not working, you need to be good at managing your cash (read more about that here before you start looking for more funding).
Why now? Recessions are inevitable. And many are predicting that winter is coming in 2020.
As a result, YOU (energy entrepreneurs and startups) must take the steps necessary to prepare for the possibility that you will need more cash to weather the storm. As one of your investors, I want to know that you have a plan to manage your cash. And hope is not a strategy.
With the average recession lasting around 11 months — more than long enough to f**k your startup (and my investment) — you know it’s critical that you start taking the steps to recession-proof your business as soon as possible.
1. Make sure you know the right metrics for your energy business.
During a recession, investors care less about your product development and more about your ability to make money. When the economy is good, investors are often willing to allow a little more leeway for your startup to grow. During a recession, investors want to know that you’ll be able to earn money and capture market share quickly. Otherwise, we may withdraw funding. As a result, you need to understand and be able to showcase the right metrics for your startup, including:
- What are you using my money for and what will this accomplish
- What are your customer acquisition costs and can you define your marketing and sales funnel metrics (are they any good?)
- Can you define your customer lifetime value and does this exceed your costs to acquire and serve them
- How I am going to make money from giving you cash
Without these key answers, you can’t provide me (investors) with the security I need. As a result, I may not support you even if I am already on your cap table.
2. Secure funding before the recession begins.
Recessions suck for investors too. It’s not you, it’s me. I lack disposable cash to invest right now, so you better hit me up when the treasure trove is full. Ironically, when the economy is strong, it’s much easier for you to find venture capitalists willing to invest. Doesn’t this sound like bullsh*t? In business school, day 1, they taught me to invest when prices were low and sell when prices were high. During a booming economy, investors love to invest when prices are high…(WFT?). Full of cash. Irrational exuberance. Risk aversion (easier to back winners than someone like you that has yet to show unicorn status). Lack of skill. I will add this blog to my queue. Back on point. You know that a recession within the next couple of years is likely. 2020? To prepare, get the funding you need for your startup before it begins. Take into consideration what funds you need to survive the length of a recession. DO IT NOW!
3. Showcase your growth.
Building on my first point, you should be growing during a recession. If you’re able to provide more sustainable, less expensive energy solutions, customers, like investors with less cash, are more interested in trying your solution over the dominant market crap being bought today. In fact, many of the dominant technologies that are now standard in oil & gas were born out of market downturns. Intellectually, this made sense to me in the past; however, now living through low oil prices as an employee of one of the largest energy companies, I can see it first hand. We look for novel ideas on a more desperate level when our budgets get tight and we still need to pay dividends.
Before the recession begins, take the time to clearly display how your business has the potential to grow throughout a recession and why. This will help build my confidence in your ability to build future free cash flows (the holy grail for us non-hype investors).
4. Build your reserves.
During a recession, your business may need to grow based on your own cash reserves, rather than bringing in additional funds from investors. In some cases, this may substantially limit your growth — but not if you take the time to build your cash reserves ahead of the recession. What?
If you already have those funds on hand, you won’t have any trouble hiring new developers (seems to be every energy startups #1 need), driving more leads into the funnel, paying your expensive Rolodex sales guy, and executing on projects already sold. With reserves, you won’t need to rely on the whims or fears of investors to help make it happen. Consider some of these strategies:
- Raise a round of funding when you have momentum and the economy is strong to add “growth equity”, even if you have the ready cash to make advances on your own. This will enable you to put more by for a rainy day.
- Make sure that you’re investing in your future. I cannot find my source but remember reading about the CEO of Bloom that always under promised to his investors and over-delivered by having more cash on hand during board meetings than expected. DO THIS. I rarely see this in any board meeting today. At the end of February each year, my parents would head down to GWB (George Washington’s Birthday) in Nuevo Laredo, Mexico and stick me with a babysitter. No, I did not have any Don Johnson type experiences; however, one of them taught me to always under-promise and over-deliver. As a kid, this is all about curfew. I told my parents (and my date’s parents) that I would be home by 1am…and would always be home at least 30 minutes earlier. Trust and transparency get rewarded in the capital markets. It also gets rewarded by private investors and parents.
- Make a “recession kitty” part of your existing fundraising strategy. This is an interesting one to me since I rarely see this being used during funding rounds. Anyone else have a comment?
5. Be ready to swap out your strategy (the pivot).
To survive a recession, your company needs to be flexible and have the answers.
Strong economic times often drive entrepreneurs to focus on fast growth and building capital for the business in a hurry. This strategy often relies on spending money at a dramatic pace, which may make it difficult for you to hold on to that important reserve fund.
Before a recession arrives, however, it’s time to change gears.
Maybe you should consider the topic in your next board meeting. Consider how you will survive in an environment whereby you cannot raise more money as expected? How will this impact your team (hiring, retention, etc…)? How will this impact your customers? How will this impact your development? Let’s see it! Impress me.
6. Revisit your financial “needs.”
Have you and your CFO modeled a low case for the business? What can you absolutely not live without? Once you figure this out, how will you let go of the resources that are not absolutely necessary? Health insurance and employee salaries, for example, might be non-negotiable. But you may find that there are other benefits employees are willing to live without so that everyone can keep their job through the recession. Create a solid plan that your board understands now in case there is no more easy cash. This may also build more trust and credibility with your investors (Hint Hint).
7. Watch your hiring practices.
This may be the most important step and is often to founders and management teams the most difficult. Founders are not taught how to create a hiring strategy nor how to manage growth (and lack thereof) when it comes to people. There is a culture debt that arises every time you hire someone that is the wrong fit for the existing core values of the company. When you are in the midst of having to let people go due to lack of cash, there is a natural movement away from focusing on the core purpose and mission of the company and instead towards fear, uncertainty, and doubt.
It is time to start working on that worst-case scenario plan for the board and include the impact to personnel and how to avoid it at all costs. If you’ve been in the habit of bringing in new staff as quickly as you can to help improve company growth, keep in mind that during a slow down, you may not be able to support those additional employees. Hiring one strong developer is equivalent to borrowing $1M (do the math). New employees can be particularly problematic if you’re hoping that another round of fundraising will be adequate to pay for their salaries, benefits, and space they need to operate efficiently. As recessions near, consider some of these strategies:
- Make sure new hires are sustainable. (Please Please listen to me on this one) This is not the time to bring in an employee for a role that you aren’t sure will be a good long-term fit for the company–nor is it time to overload your company with new employees. This isn’t just for your benefit: if you let those employees go during a recession, they have more trouble finding new employment.
- Try using contractors or freelancers instead of hiring employees directly. Often, this will make it easier to handle contracts and prevent you from having to let an employee go if your funds take a hit during the recession.
- Make sure that employees understand your perspective, especially if you do bring in new hires immediately before a recession. If you need to hire temporary workers, for example, let them know that you may have to let them go if the recession hits your business hard. These workers will then have an option of whether to take that contract or stay with their current employer. It also means that the employees you do get will be more loyal.
8. Prepare to take advantage of the recession.
Sometimes, recessions can offer more opportunities for your energy startup than they cause problems. This is what entrepreneurs were born to do. Take this time to go to war and take market share when big customers are taking a break or reducing spending as much as possible. Make sure that your development team is ready to continue working in spite of limited funds, or find investors who are willing to support your business in spite of the recession (but do not take advantage of us because our war chest is not unlimited). Often, you’ll find that this will set you up to enjoy greater success.
Recessions are inevitable. How you handle them, however, can make the difference in how your business and my investment succeeds. 2020 is around the corner, do you have your disaster plan ready for me to review?
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