Market volatility waxes and wanes. For businesses large and small, it’s a normal backdrop to everyday life.
Of course, market volatility can be very disruptive, sometimes fatally so, for startups and other businesses that rely on external funding to survive. When returning to the capital markets is temporarily not a viable option, founders need to revert to ‘Plan B.’
One important aspect of that backup plan is capital preservation.
“Periods of market volatility or uncertainty demand caution from all businesses, but in particular early-stage enterprises,” says serial entrepreneur and investor Steve Streit, who advises startups across industries. “Under these circumstances, capital preservation becomes critical.”
Here’s how Streit tells his portfolio companies — and any other founders who’ll listen — to position themselves for leaner times.
Outsource Non-Core Functions
Does your 10-person startup need an in-house finance person and a separate in-house HR lead? Probably not. Until it’s bigger, it can get by with one or two admin leads who handle the aspects of those roles that must be done in-house and outsource the rest.
Outsourcing can also help with functions for which you have absolutely no internal expertise, and no hope of getting it soon.
“Outsourcing can be an invaluable tool for growing your business by bringing in skills you don’t have in-house, but it’s important to know what roles to outsource and when is the right time to do it,” says Kristin Tyler, co-founder of LawClerk.
It’s also, of course, more affordable.
Delay Non-Essential Hiring Plans (For Now)
Your startup’s revenue per employee will start low (technically, negative) and rise as its sales increase. By the time you cross the $50 million sales mark, it should be well above $200,000, according to Finmark.
But that’s a long ways away. For now, every employee you hire represents a financial drag (on paper) for your business. They are critical to your company’s growth, mind you, but many startups fail because they try to grow too fast — and staffing up too quickly is a big reason why.
Inject Your Own Capital (If You Can)
Some founders imagine they’re done bootstrapping after an initial period of investment, but worsening macro conditions may demand additional infusions of capital. Until your company is comfortably cash-flow positive, you must be prepared to do what’s necessary if your personal resources allow.
Look to Grants, Prizes, and Low-Interest Loans
Does YCombinator’s famous “standard deal,” where each cohort company gets a $500,000 seed investment in exchange for 7% equity, sound tempting? Unfortunately, not every startup (not even close!) will be selected as a YCombinator portfolio company. And startup incubators like YCombinator certainly do not qualify as realistic “Plan B’s” for cash-poor startups.
Instead, look to non-dilutive opportunities like startup competition prizes and public grants. These “one and done” sources of funding won’t provide recurring revenue, but they can help bridge a funding shortfall during difficult times.
Look for Short-Term (But Sustainable) Revenue
If shortening your product development calendar isn’t realistic, consider alternative sources of revenue like consulting for (non-competitor) startups or renting out spare capacity in a facility you own. As with “one and done” funding sources, every little bit helps.
It’s Tough Out There. Stay Disciplined.
As a business owner, you know as well as anyone that businesses appreciate certainty. When near-term uncertainty obscures the longer-term outlook, it’s more difficult for you to make important decisions about where to invest.
Since you can’t control much beyond the four walls of your own business, your best response to uncertain times is to maintain discipline and preserve your resources, especially if your company has yet to turn a profit.
Conditions will improve, sooner or later. But that won’t matter if your company is not around to benefit.