- Assess your burn rate.
- Rejigger your business model for survival/opportunity.
- Change your operation plan/cut costs.
- Move with speed and urgency.
âSerial entrepreneur lays out coronavirus survival roadmap for startupsâ - San Francisco Business Times
Blank, a serial entrepreneur with an estimated net worth of $2.5 billion, arrived in Silicon Valley in 1978 and went on to have a successful 21-year career in the tech world â co-founding or working in eight startups, four of which went public. He helped lead the âlean startup movement,â which outlines how a startup can quickly find product fit, and teaches this scientific approach to managing a startup at Stanford University.
Having gone through three major financial crises before, Blank knows exactly the plan companies need to follow when all hell breaks loose and the future looks uncertain. The ones that follow this advice survive, while the ones who donât, perish. Trust him, he says, heâs seen it before.
âIf you canât think independently, if youâre waiting for orders, youâre dead on the battlefield,â he told me.
First, a startup needs to determine if it is cash flow positive or negative. In other words, does your companyâs revenue bring in more money than the expenses. If the answer is no, here is what Blank wants you to do:
Step 1: Assess your burn rate â how much cash youâre spending, and how long you can last before itâs gone. Remember, all those growth projections you had before coronavirus are useless now. Expect this downturn to go for another three months, six months or even a year.
Step 2: Pivot, or as Blank says, ârejigger your business modelâ for survival or opportunity. In addition, youâll need to change your operation plan, meaning reduce spending. Unfortunately, this may mean laying off staff.
Step 3: Move with speed and urgency. Do step one and two immediately.
Blank spoke with me about his survival strategy for startups, going into greater detail as to common, yet deadly, mistakes founders make during a crisis and the opportunities that may exist.
Whatâs the most common mistake youâve seen startup founders or CEOs make during a financial crisis? Iâve lived through three of these crises â in 1987, 2000 and 2008. Unfortunately, one of the biggest costs for startups in their early days are their employee personnel costs. You might have to be laying people off. And the mistake Iâve seen founders, CEOs make every time was that they never cut enough on day one. Whatâs worse was they would cut 10% of their employees and then go back later and cut another 10% and then go back again and cut another 10%. What this did was destroy morale. Everybody was perpetually looking over their shoulder. Productivity dropped to zero. Instead, they should have done one big layoff on day one. Sure, everybody will feel horrible, but at least they would know the laying off was done and they could get back to work.
Isnât that a little harsh? While that seems cruel, itâs actually healthy because you get to be a surviving company. Then you get to rehire those people after itâs over. Iâve seen companies go out of business because CEOs were unwilling to make the changes that were required immediately. This is not a time for "letâs have a meeting to have a meeting to plan the conference rooms that have the meeting.â This is something that needs to be done quickly. Not with panic, but with speed, urgency and compassion.
When is it time for a startup to surrender? If there is no possible way to pivot your business model and you have three months of cash left, shut it down now and distribute the cash back to your investors and your employees. If you think you can survive and there are pivots and other things you could do, try them until you run out of cash, at least to the point of being able to pay employees.
Whatâs the worst thing a founder who is headed for the end can do? You never run it to zero without making sure you have compensation for every one of your employees. The worst thing a CEO who is running out of cash can do is not have at least two weeks of paychecks for employees. Donât run it to zero and then tell people that week weâre out of cash. For me, thatâs either the most naive or stupid or venal thing you could do. It is up there on startup sins right now.
Where do you see opportunities for startups? Whatâs going to be painful for lots of startups is going to be huge opportunities for others. If you happen to be in a space of telemedicine, online training or online education, your business is booming. Another opportunity for startups in San Francisco and Silicon Valley is that you can hire people you never could have imagined before. Itâs incredibly hard to hire world-class talent because youâre competing with not only other startups, youâre competing with the giant sucking sound of Google and Facebook and Uber. But as layoffs grow, a good number of very talented people are going to be on the street. If youâre a startup with cash in the bank, I would be over hiring world class talent, even if you donât need them now. These are huge opportunities for startups that are in the right place at the right time.
What surprises you most about the current financial crisis? This is a financial crisis thatâs artificially driven by a pandemic. All the layoffs weâre seeing are not a fundamental flaw in the economy â though theyâre exasperating all the things about a bubble economy â but itâs not like the bubble burst. No, we all got sent home to save thousands, if not hundreds of thousands, of lives. Thatâs a very different type of economic crisis. Thatâs never happened in the history of the world economy. No oneâs ever parked the economy to save a couple hundred thousand lives. And weâre already hearing about a backlash. Some are saying itâs more important to save our airlines than it is to save grandma.
Do you agree with that sentiment? Of course not â given Iâm in the age group of grandma.