September 6th, 2023 | By: Wil Schroter
When times are good at our startups, we think it will never change; when times are bad, we think it will never change.
Yet the only constant with startups is change.
The challenge for many Founders is that this is likely the first time we've had good or bad times, so we have yet to see a full cycle. That makes it difficult to know whether this is a short-term blip or a long-term trend. As such, we tend to grossly overcompensate by spending too much in good times and running for the hills in bad times.
We all have this fantasy that our startups constantly grow "up and to the right!" on our beautiful charts. The reality is way different. The best way to think about our startup journey is a constant cycle of "feast or famine."
Our feast periods are typically tied to funding rounds or early customer revenue. At that moment, we're feeling fat and happy, and we think in terms of abundance. We make key hires, spend aggressively on customer acquisition, and think more about growth than safety.
But invariably, the money runs out, we panic, and we start cutting every possible cost with the assumption that "This is the end!" In many cases, we're able to find a way out of the calamity with yet another funding round or some new revenue, and then the cycle repeats itself again... and again... and again.
So how do we deal with this crazy cycle? We need to learn how to act in good and bad times so that we can level out our reactions to both. Let's start with the "good times" because, frankly, those are way easier to get right.
In good times we're going to be highly encouraged to focus on growth, which is generally a good thing. But we need to realize that every commitment we make is actually a liability that we have to sustain long-term. Instead of spending all the money like it's never going to go away, we should consider setting a certain amount aside for rainy days.
A good rule of thumb would be to set aside 1/3 of what we have for a "rainy day fund," even though, by definition, the skies look very clear right now. The old adage "It's better to have capital and not need it than to need capital and not have it" absolutely applies here. Limiting our spending in good times is hard, but this is exactly the point.
It's never a question of "if" the bad times will be an issue; it's a matter of "when." Whether it's macroeconomic forces that slow things down, a major competitor entering the fray, or just a capital raise that takes forever to close, there's always a drought looming.
Our tendency in bad times is to freak out and assume we're done for. But experienced Founders will tell you that this is a natural cycle of contraction that every startup goes through, many times. We have to pay back staff, marketing expenditures, and anything else that we can to give us more runway for the time being. It's painful, but it's real.
Now, if we were more prepared in the good times, we may have stowed away a bit more cash to help us through, but that doesn't change the fact that we still have to go on a bit of a diet to survive. And that's what this is all about — survival. We need to be around long enough for the next uptick — that's the only objective.
I’m Burnt Out. What Do I Do? When we hit a point of burnout it's important that we understand what to do about it. If we ignore it, the problem only gets much worse. So let's take a look at what Founders do to deal with burnout head-on.
Manage Downside First, Big Opportunity Second (podcast) Having a downside strategy allows for open conversations to conclude effective upside plans and address issues level-headedly.
Optimizing for Productivity Working through peak productivity is easy. It’s the valleys that we’re concerned about. The key is to plan for and optimize the valleys so we can recharge effectively.
Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes Bizplan, Clarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.