How Startups Should Approach Growth During The Downturn
By now we’ve all seen the Y Combinator note to founders which accelerated the wave of fear and uncertainty spreading through the startup world. Extremely difficult global macroeconomic conditions, a result of a combination of supply-side disruption and the war in Ukraine among other factors, have led to a tightening of purse strings among angel investors, VCs and PE firms.
While there is confidence among economists that this particular period of economic strife will be a ‘short and sharp’ recession, rather than a long-drawn-out crisis like the aftermath of the 2007 subprime mortgage crisis, that’s not much comfort to 2022’s cohort of startups that were hoping to raise preseed, seed or series A funding this spring, summer or autumn.
As an agency that deals principally with startups, we have heard many stories of woe from founders who have found that their raises are taking longer than expected, or raising less cash than expected, or raising on poorer terms than expected, or not happening at all.
But as a startup that needs money to develop the product, team or growth, you’ll still need to find ways to show positive signs of traction.
How do you do that without the capacity to make big hires? Or without the cash runway you thought you’d have? Here are some of our top 3 tips for dealing with these challenges:
1. Get to know your customer
Quantitative and qualitative in-depth research is something we do at Growth Division for our clients when required. But if you’re in a position where you need to conserve cash, but you’ve got time on your hands, we recommend getting out there and doing some research yourself. Hustle to try to get interviews/calls with people who fit your Ideal Customer Persona (ICP) and find out more about their pain points, challenges and where they research products.
Even if you only manage a handful of interviews, it’ll help you enormously to plan product development and perfect your messaging – and with better messaging, all of your marketing efforts will have a better return on investment.
You could also put together a quantitative survey using a tool like Survey Monkey, but it can cost a chunk of money if you have a fairly specific customer profile you want to talk to.
2. Create a robust experiment framework
We’ve written before about how to create robust growth experiments. With budgets constrained, it’s really important that you design your experiments in such a way that you get clear results.
That means only testing one variable at a time. It means carefully keeping track of each experiment as you run it. It means detailed experiment planning including a reasoned hypothesis, the metrics you’ll use to measure success, and an ICE score (Impact, Confidence, Ease).
With well-designed experiments, not only will they have a better chance of success but you’ll also have useful learnings that you can use to improve your marketing efforts going forward. Messy experiments = messy results = wasted money.
3. Think very carefully before stopping marketing spend
This is a difficult one – because there are cases where you absolutely should cut or stop marketing spend. If your runway is very short, and you’re not able to generate ROAS (return on ad spend) then continued marketing spend could sink your company.
But on the other hand, if all your growth stops, you’ll find raising again extremely difficult.
It comes down to your unit economics – lifetime customer value, customer acquisition cost (CAC), and payback period. You need to evaluate whether with your current cash reserves your payback period on your average CAC is short enough that new customers will be worth getting.
This one depends on your business model, so we can’t offer one-size-fits-all advice. Talk to investors, talk to advisors, and do diligent financial planning. But remember: cutting marketing spend is not always an easy solution to prolonging your runway. In some cases, it can be the decision that kills your company. Even just maintaining a small spend to continue generating learnings and positive data signals could help you hit your fundraising goals next time the purse strings loosen.
Our final thoughts
This may seem like an unusually serious blog for us – but people put their heart and soul into their business ideas, so it’s important to take the advice we give seriously.
These are our genuine top three tips to weather the storm. Remember though – this too shall pass. It’s a difficult time, but if you can get through it and show positive signs of traction then your company should be in a great spot when economic conditions improve.
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