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The Season of Startup Cockroaches is Upon Us
Hunker down & survive. Make tough choices faster and don't become a zombie. (#8)
I started my first company in 1996, a web services business with three co-founders. In our first year, we each made $12,000. I was ecstatic. We had no clue what we were doing, but we found a market selling our services to bigger U.S. consulting firms that were building a bunch of dot com businesses, desperate for talent and quite happy with the exchange rate (USD to CAD.)
We ended up doing so much work for one company in particular that they acquihired us (in 1998.) At the time it felt like a solid move. We were getting paid good salaries in USD (again, exchange rate ftw), and had plans to grow the company together with most of the design, dev and product talent in Canada, and sales, marketing & biz dev in the U.S.
Although there was a ton of optimism around the web between 1998-1999, we were still a small company and didn’t have the scale to do massive projects for the IPO-level startups that existed. So we pivoted into building a SaaS project management product (although back then we called it an Application Service Provider.) This is before Basecamp (but we were no Basecamp!) There weren’t a lot of web-based applications out there, and almost no one was charging monthly or talking about things like monthly recurring revenue.
And then the dot com bubble burst. 🤯
Services work disappeared instantly. A lot of services companies (including the big ones) fell apart. But we survived. We survived because we had this fledgling project management tool that people were actually buying and paying for.
We continued to grow that business and focus almost all of our energy on it (we still did the occasional service project.) But we could never really get to scale. In 2006 I decided I couldn’t work on the same thing, at the same size, without any sense of how we’d scale, so I left to figure out what to do next. From 1996 to 2006 was 10 years working with the original co-founders of my first company, and additional founders of the acquirers. It was a long run. Too long. And I had gotten complacent, somewhat comfortable, but unsatisfied with what I was doing. I promised myself I would never do that again.
To be clear, this company was a zombie. 🧟 I just didn’t realize it or accept it quickly enough and take action. And zombie companies are failures.
From “zombie failure” to more failure…
In 2007 I started a new company, Standout Jobs. It failed. I wrote about that extensively here and here. And then in 2008 there was a global financial crisis. Hiring slowed everywhere, layoffs were rampant, and my startup wasn’t going to survive. We did make it through 2008, but ultimately sold the assets in 2010.
Standout Jobs wasn’t a zombie (it didn’t survive long enough), but we also couldn’t make it as a cockroach—hunker down, live through the tough times, and come out with a chance at winning.
Part of the challenge is that I didn’t make decisions quickly enough. We could tell in late 2007 that things were going to get bad, we just didn’t anticipate they’d be that bad, and we were slow to change.
I’m not always so glum! I promise this post has some practical suggestions for startup success. Please subscribe for more (happy + useful) content like this in the future.
Zombie startups versus cockroach startups
There’s a decent amount of chatter online about “cockroach startups versus unicorn startups.” Forget that. The unicorns are getting slaughtered, and represent a very small percentage of startups anyway. The comparison is OK, but since most startups will never be unicorns, it seems superfluous. And both cockroach and unicorn startups can be great—but zombie startups are always terrible.
So what’s the difference between a zombie startup and a cockroach startup?
Zombie startups are those that are already dead, but don’t know it. They’re shuffling along, burning cash, and likely bloated. They could live for a long time, but realistically won’t get to product-market fit (PMF).
In Canada (where I’m based) we have great tax credit programs for technology startups. For example, SR&ED is a program designed to help subsidize R&D work. Unfortunately a lot of smaller Canadian startups survive almost entirely on SR&ED or other tax credits. That’s not success. You’re a zombie.
Cockroach startups are true survivors. When things get rough, they adapt quickly, harden themselves to the brutal environment and live. Cockroaches don’t give up, but they also don’t extend themselves when circumstances are against them. Cockroach startups are led by cockroach founders—those that keep pushing, with minimal means, driving themselves to get to product-market fit and winning. It may take quite a long time to get there, but cockroach founders put themselves in a position to at least give it a real try.
It’s not fun being a cockroach founder and startup. It’s brutally difficult and survival isn’t guaranteed (yes, even cockroaches die sometimes.) But it’s often a sign of true belief, purpose and determination.
A zombie company on the other hand also survives, but it comes out of a downturn no more likely to succeed than when it went it. It plods along, almost aimless, feeding on scraps and directionless.
How to be a cockroach startup
1. Cut costs:
Obvious right? I know, but it’s not so easy. This almost certainly means you have to let employees go. Your people are always your biggest expense, and you probably won’t survive without trimming the staff.
The first time I had to let people go (which was back in 2001-2003) I cried. Not in front of people, but after. That’s how shitty I felt. I had to let people go because the company wasn’t generating enough revenue and I felt completely responsible. It wasn’t performance related.
If you do have low performers, please let them go immediately. You’ll save money and in my experience those that stick around after (who are your better / top performers) will thank you for it. Many companies are laying people off right now—and while part of this is economically motivated, recessions and downturns are a good time to get rid of low performers as well, without having to make it about their performance. (I know this is uncomfortable, but it’s true.)
Otherwise, look at all the non-critical roles within the company and cut. Do it with an enormous amount of empathy, but do it quickly and professionally. In my experience, many startups with 30-100 people already have ~25% too many people, who were brought on board when times were good. Times are not good.
If you haven’t let people go yet, it may already be too late. Startups that let people go very early in 2022, put themselves in a position to extend their runway much more effectively than those that let people go in late 2022, or are planning layoffs in 2023.
I fully appreciate how unpleasant it is to talk about and deal with reducing your team size. But you chose to be the CEO of a startup, and you’re the CEO in good times (when you get to host office parties) and bad times (when you have to make painful decisions.)
Beyond employees, look at every expense you have and cut ruthlessly. Software is a shockingly high cost for many startups—2nd or 3rd on the list. If you have a team that’s even 20 people I guarantee you that two things have happened:
People are using different software products to accomplish the same thing (e.g. Miro and Mural)
People bought software and aren’t using it or fully maximizing its value
The bigger your team, the worse this problem gets.
Brandon Arvanaghi, founder at Meow (cash management for startups) has a great Twitter thread on how his startup has saved tons of money:
You can’t cut your way to victory. While cutting—even if you can get yourself to profitability—you still need to figure out how to grow. Cutting alone isn’t enough to win. But if you don’t cut now, you’re probably toast.
2. Manage cash:
Money in the bank over everything. 💰
Being a hoarder is terrible, but not in this context. Hoard your cash. Manage it carefully. When you believe there’s always more money around the corner (be it from growth or raising from investors) you spend. “Burn, baby, burn!” is the advice you may have been given. Ugh.
To manage cash effectively, you’re going to have to make some very hard decisions. And some of those decisions, unfortunately, may hurt other people:
Stop paying yourself and your co-founders: You can’t screw with other people’s lives financially if you’re not willing to sacrifice yourself.
Negotiate longer payment terms: If you sell to enterprise customers, you know they can have brutal payment terms (Net 120, Net 180), and for a startup that makes life very difficult. Guess what? You also have vendors. And you may have to go back to them and negotiate longer payment terms too.
Defer salaries: Brutal. Awful. Embarrassing. But it might be necessary.
Hire remote contractors: Contractors’ hourly rates vary based on geography. There are many talented people working all over the world, and you may have to get more proactive about tapping into those resources. If you haven’t used a service like Fiverr or Upwork you may be surprised at what you can get done (and the cost.)
I asked Elizabeth Yin from Hustle Fund for her thoughts on this and she wrote:
In a downturn market, cash is king. I’d recommend trying to “pay more” using your equity to preserve your cash. I’ve seen countless times employees, service providers, and even landlords accept equity in lieu of cash to allow startups to extend their runway. It won’t be any easy sell but the best founders can sell someone on the value of their company.
You also need to know your (financial) metrics. CJ Gustafson does an awesome job of highlighting a few key ones including: Cash Runway, Rule of 40% and Burn Multiple. Please read this thread:
And here’s another thread by CJ on managing cash burn:
3. Keep your current customers really happy:
You may discover that new customers are harder to come by—everyone is conserving cash and delaying purchasing decisions. But your existing customers are already on board, already paying (hopefully) and you can’t afford to lose them.
Churn is always bad, but it’s particularly bad in a down economy, because it’s unlikely you can grow out of the problem. You may not have the cash to spend on acquisition, or the time to wait for those customers to onboard, convert to a paying version of your product and pay back the money you spent to acquire them.
A few suggestions:
Reach out to customers more often. Not to up-sell but to check in. Be human.
Evaluate your support & success functions. If you have customer success and support functions, check in on them and see how things are going. Is response time fast enough? What about resolution time? Anything you can do to add more value when a customer reaches out to you is a win.
4. Simplify the product, the target market & your go-to-market strategy
Now is not the time to over-complicate anything. You should continue to run experiments and learn, but making big bets is risky because it usually means spending more money.
The more you simplify, the more you can reduce spend.
The more you simplify, the more you can focus.
The more you focus, the easier it becomes to make hard decisions.
A few key things to think about:
Adding more features to your product isn’t going to get you out of a downturn. More customers won’t buy your product quickly enough & key metrics won’t change significantly. If anything, you might consider removing features and making sure the core of your product is legitimately working and creating value. Simply put: don’t overbuild.
Go as narrow as you can on your target market. Niches, ftw. The broader you go, the weaker the value proposition becomes, and the more you’ll spend on acquisition. Find your champions and make them superheroes. If the niche you’re going after is frozen over and not spending, find another one. This is where iterating, learning and pivoting become so important.
As you simplify the product and your target market, it also simplifies your go-to-market strategy. Even in good times, it’s better to focus on a single channel and win there before really branching out; but that’s even more true in a downturn. Channel experimentation costs money. And many channels are going to be performing differently given the economic circumstances. If you have a channel that works reasonably well, invest in optimizing it.
5. Communicate more; with everyone
As much as you may want to turtle and hide, now is the time for the complete opposite.
If you have investors, update them regularly, with the good and bad news.
Communicate transparently with employees. If things are going sideways, some employees may jump ship. But many will stay and rally.
Keep your customers close. Customer support and success are your friends. Complaints may increase (everyone is grumpy), but you have to keep pushing ahead with a smile on your face.
6. Launch a service offering
Selling your time isn’t necessarily the greatest business model, because you don’t scale. But it can help pay the bills. People pay for services and consulting all the time. For example, you could add a setup/implementation or training service to your product.
That’s precisely what the Kickflip team did back in 2012 when it was first building its solution. The team had very little funding to build a full-blown product, but they had one very large potential enterprise client. So they built what they could quickly, and did a lot of the setup, configuration and implementation manually. The key is they charged a service fee for doing so, instead of eating the cost. As they added clients, they continued to charge for the manual implementation of their software, because it wasn’t ready to be fully self-service. (Note: This fits very well into the “do things that don’t scale” mantra, which is also a good reminder when times are tough.)
Today, Kickflip has a fully self-service SaaS product that clients can purchase, setup and launch without the team having to help with the implementation (and charge a setup fee.) But without charging in those early days, Kickflip wouldn’t have bought themselves the time they needed to get there.
You can also provide non-related services to pay the bills and keep the lights on. In 2006, Marc Gingras founded Tungle (a scheduling app.) He’s now CEO/co-founder at Bloks, an AI-powered note taking app that’s built for quick capture and puts your thoughts in context. While Tungle was in development, Marc was moonlighting as a VP Biz Dev for another startup to generate revenue. He also had two contract developers that he got involved in another project outside of Tungle, which he was project managing. These “side hustles” generated ~$200,000 in profit, which helped cover the cost of the 3-person core Tungle development team.
Make decisions quickly, especially the tough ones
Now is the time to move fast. Not haphazardly or chaotically, but quickly. As a CEO/founder you’ve got your employees, customers and investors all looking at you to guide things forward. Your job is to make decisions.
When things are going well, you can put off harder decisions (even if you know they’re right) and it can be less damaging. That’s not the case when times are tough.
There’s a good chance you’ll make some wrong decisions. As long as you own up to them, remain transparent with your stakeholders, and adapt, you can survive the rollercoaster.
Cockroach startups survive with a chance of winning; zombies die a slow and meaningless death
In doing research, I found a great presentation by Aloke Bajpai, CEO & Co-Founder at ixigo. The presentation is from 2016, and talks about how to build a cockroach startup. As he recently pointed out on LinkedIn, “Did this talk in 2016 on building a cockroach startup - Could literally change it to 2022 on the slides and everything still holds true. 🤓”
Side note: The best comment on Aloke’s post comes from Ravi Kumar:
Long live the 🐪 🐫 startups.
Founders aren’t the only ones that need to take action and do so quickly. Investors are also going to be in a tricky spot. Many invested in startups at inflated valuations, with an expectation that startups would grow into those valuations quickly. That’s going to happen less and less, and many startups going into cockroach (sorry, camel) mode simply won’t grow quickly enough to raise subsequent rounds at all, or at higher valuations. That’s going to mean lots of down rounds or flat rounds. The most popular financing round now is the bridge round. Hopefully most are not bridges to nowhere.
Unspoken fact that VCs won’t talk about in Dec 2022: most tech companies are not worth their liquidation preference.
What does this mean ?
It means that a company’s current value would not clear the amount of investment dollars raised, and many VC portfolios and their marketing materials with high IRR and TVPI are stuffed with illiquid and unrealizable paper prices.
Read the rest here.
Startups survive downturns and even thrive
There’s no reason to sugarcoat things. Things are going to be rough for a year or two. If you’re the CEO of a startup (at any stage), you’re going to be making major decisions daily, with little time to take a breath. But there is hope.
I’d like to leave you with this great blog post: Leading Happy Teams Through Crisis: 5 Ways To Keep Your Team Happy And Motivated in a Recession. Without giving it away, here are the 5 things the blog post suggests:
Help them [employees] grow and add new skills
Use small thoughtful rewards over cash (and other forms of praise)
Find inexpensive perks
A Win-Win Change: Offer flexibility
Listen carefully in your one on ones
Jason Evanish is CEO / Co-founder / Head of Product at Lighthouse, and worth following on Twitter.
To the 🪳 (and 🐪) startups & founders out there, I wish you well. Survive and thrive. 👏