Redundancies, furloughs and emergency fundraising. This wasn’t the way 2020 was supposed to go for the clutch of major Silicon Valley tech firms that have been hit hard by the economic fallout from the Covid-19 pandemic. One thing is clear. Mastering how to be a resilient company has never been more important, with the global pandemic still lingering above us all like an angry, intimidating storm cloud.
But what does being a resilient company mean? It’s something that is not always given much credence in some quarters. After all, who needs to be resilient when you’re a Unicorn worth billions?
Many experts feel that the Covid-19-induced global crisis have answered that last question by blowing apart the myths of Silicon Valley’s innovation, its irrational approach of ‘fundraising first, everything else second’, and the power of big tech. More than that, prominent commentators such as the MIT technology review assess that it shows the US in particular has lost its way in being able to create technologies that are relevant to our most basic needs – such as health.
It’s pretty clear that all companies are not created equal. And if the effects of the pandemic have shown one thing, it’s that many of the golden boys of the Bay Area are seriously lacking in resilience. The mass layoffs at so-called marquee companies keep coming are as much evidence anyone needs of that.
Here at Starttech, we believe that resilience is something which must be built-in, from day one. It’s a product of sound strategy based on capital efficiency, early profitability and business model first.
But how do you ensure that? We’ll take a look in this post.
How to be a resilient company: an introduction
Debate continues to rage about the ‘Covid-19 effect’, and the uncertainty of the ‘new normal’ that awaits.
The pandemic has truly laid bare the fragility of some of the so-called golden boys of tech startups. But how can ‘colossal’ companies who just a few months ago on top of the world now be in dire straits and hemorrhaging employees at an alarming rate?
There are many factors, of course. But something that would have helped is resilience. Along with flexibility and resourcefulness. The thing with these things is that they are difficult to buy, develop or acquire.
Yes, the Bay Area has given the world Zoom; for those fortunate enough not to lose their jobs, as well as Netflix to keep people sane. Others have done extremely well out of it, such as online retailers like Amazon; a real saving grace for those who are locked down or choose to avoid physical stores. Tech devices such as tablets, laptops, etc are also in hot demand again. And in the US, Instacart, and other platforms like it all over the world, has been helping to keep scores of self-isolating people fed with online groceries.
However, overall, the pandemic has laid bare the limitations, inefficiencies, and pure impotence of some of the world’s richest companies. You know their names, so no need to repeat them here.
What is interesting from our perspective at Starttech, is that this damaging crisis created by the coronavirus crisis has actually come to validate our theory; a theory we have been actively putting into action all these years. Of building resilient companies based on sound business models, sustainable growth and early profitability, versus going for rapid growth based on raising significant VC funds. CEO and co-founder Dimitris Tsingos perhaps best sums up the mixed feelings the current situation has brought.
“The companies of this world that operate with a ‘Silicon-Valley-inspired’ business model are having a tough time due to the current global crisis. Although we hate to say ‘I told you so’, it is indeed a significant and timely (yet bitter, for the entrepreneurial community) validation of our philosophy and approach.”
All that glitters is not gold
Many companies and complete industries have been truly turned upside down. And the magnitude of the effects are still unfolding before our eyes. Many former startups, even some of the biggest ones, have started to lose their glitz and glory very quickly. Not just in the USA. But also here In Greece, as well as across Europe and the rest of the world.
According to a startup layoffs monitor, close to 46,000 people have lost their jobs since March 11. The mass layoffs we are seeing are just the tip of the iceberg of what’s rotting inside. Or if not rotten, then built on foundations of sand; judging by the fallout from a relatively short 60-day period of lockdown.
Typically, layoffs are the most obvious sign of where these companies thought they were and where they really are. That is, in comparison to where they seemed to be to everyone on the outside. Nobody decides so quickly to let their valuable talent go, or put them on an enforced hiatus. But it has happened and continues to happen. The very people who are key contributors to what these companies called success are being jettisoned overnight.
Some might say that it was a wise and necessary damage limitation exercise. Reduce expenses and spending. But how can this be true for startups, scale-ups or companies which seemed to be colossal. How was it so easy to break down in just a few weeks of uncertainty? And if it’s not about breaking down, why do companies turn to layoffs so soon? Of course in many cases there are other factors which had caused certain actions, so we cannot be overly critical. But we can play the devil’s advocate and ask these questions.
For Starttech, the actions of the past few weeks acts to verify our strategy; one that focuses on resilience that comes from early profitability and capital efficiency. It is proving (to us), to be the only sure way to sustainable growth. And its the reason why we’re[still] hiring during the pandemic.
We are not alone
Recently the prominent Professor of Entrepreneurship Daniel Isenberg gave Startttech a shout-out on our model and approach. He stated:
“There is absolutely no substitute for a product/service that is so valuable and delivers so many benefits to customers that they PAY for it. Resilience is not a product of chance, but one of strategy and design. Call it ‘capital efficiency’, or ‘early profitability’, or ‘business model first’, or just ‘The#StarttechVentures way’.”
While Daniel’s namedropping is humbling, it confirms that it’s not just Starttech’s way of thinking here. We are not the only one’s who share this vision of early profitability. We’ve repeatedly stated on this blog the importance of mastering how to be a resilient company. And we are keen followers of Isenberg’s philosophies. They are also the reason for our growing #ScaleUpGreece community efforts.
It’s all about connecting and sharing the same vision on how startups and fledgling companies can focus on creating real value; by building a scalable business model. A model which is sustainable. A model which first makes the most efficient use of existing financial resources (starting with the 3Fs), then goes to fundraising efforts focused on actual business needs. Generally, being business-model driven than fundraising-driven.
Believe it or not, not all early stage startups need venture capital funding.
When opinions coincide it’s because people share the same vision. And that, in the business world, means that no matter what the trends out there indicate, you will always find partners to work with; to exchange ideas with, and to grow your business and open your mind. When that happens, it’s a blessing indeed. Success can come easier, as well as an authentic company culture with it.
So, what does it mean to master how to be a resilient company? These are the golden rules which Starttech has followed since its inception in 2008:
- focus on business model first, product second
- focus on early profitability
- steer clear from those that evangelize fundraising outcomes
- raise funds only when absolutely necessary (both in terms of timing and amounts)
To avoid any misunderstandings, we’re not condemning fundraising by any stretch of the imagination. But capital efficiency and EBITDA should be your guiding lights from day one. It might come as a shock to some. But the phrase ‘new normal’ has been used quite recently – in relation to the economic downturns, in whatever shape or form. McKinsey & Company refer to it in their 2018 book ‘Strategy Beyond the Hockey Stick’.
The modern business environment was already more volatile than it’s ever been BEFORE Covid-19. The message then is still the same now. Yes, you will take a hit. But depending on what strategy you have used, you will take more or less of a hit. One of the key findings that came out of the research done by McKinsey & Company is that barring a few sectors that were exceptions, resilients (resilient companies) lost nearly as much revenue as industry peers during the early stages of the economic slowdown in 2009.
However, by the time the downturn reached its bottom in that year, the earnings, measured as, yes you guessed it, earnings before interest, taxes, depreciation, and amortization (EBITDA), of resilients had risen by 10 percent; while industry peers had lost nearly 15 percent.
This is just a small pot of gold at the end of the rainbow of resilience. You can read more extensively about the studies done by McKinsey & Company on resilient companies and their characteristics in this great blog post. Enjoy.
By focusing on the points above with our portfolio companies, Starttech enjoys helping to guide a healthy set of businesses forward into the future with optimism. It’s all about a specific mindset, which has been instilled from day one, helping to develop healthy companies that are thriving.
It’s not just about how you raise and/or spend money
Your money management plays a big part. But there’s also a whole host of things you can do to build a resilient and profitable company. We expand on these 9 steps in this post, which are in summary the following:
1. Follow the Lean Startup methodology
This gives you a razor-sharp focus to develop the right product for the specific market that you’re targeting. It hones in on your business model versus your product and on capital efficiency.
2. Go for a proven market
Focus on creating simple SaaS products that target a large market.
3. Go for high velocity B2B, consumerization of the enterprise
In layman’s terms, build software with monthly subscriptions at a low cost.
4. Automate, automate and automate
Self explanatory. Basically, wherever you can, automate as much of your operations as possible.
5. Build an inbound marketing engine
Content is vital for your business’ success. Make sure you invest your time, energy and expertise in things such as Search Engine Optimization (SEO) and/or other B2B marketing techniques. That’s so that customers will be drawn to you.
6. Use robust technology
Many innovative products fail. Why? Because the market did not want them. Your product needs to be based on robust tech. Which means it is as functional – and flexible – as possible so customer can easily use it.
7. No need for a‘complete’ feature set
Implement the features your product needs to make it work effectively for your customers. Less is more, at least in the beginning. Products with a raft of features are pointless if customers don’t need all of those features.
8. Extreme emphasis on ease-of-use
Again, this is where UX and UI meet in perfect harmony. Make it easy to use, then find ways to make it even easier!
9. Disruptive pricing
Make your product’s pricing model affordable and compare favorably to competitors. Aim to democratize a market, as this actually creates opportunities both for companies that create products and also for customers who want to buy.
If you manage to follow even some of these steps, you are on the right road to mastering how to be a resilient company.
The Silicon Valley approach
The Silicon Valley approach continues to be disproved, year on year. Only the real exceptions to the rule reach their goals of fortune and fame. And even then, if you are not set up to be resilient and depend largely on external factors, you will fail.
Let your resilience be your guide
The moral of the story here is to look beyond the unicorns. Uncover a real and sustainable approach to building a company, fundraising and investing.
Resilient startups, just like resilient people, are better equipped to weather the storms that come their way. Whether those storms are flash floods, or even more long-term difficulties.
From the moment we are thrust into this world, we’re taught that we are all created equal. We then find out at a pretty young age that this is not true. Indeed, if there’s one characteristic shared by almost every human society, it is inequality. And the same goes for businesses.
Everything depends on the foundational and fundamental values and philosophies on which they are built. Much in the same way, your try to lay the foundational building blocks to a child’s character, in their formative years.
I’m not saying it’s impossible to change later down the line. But if you put the extra work in initially, and make resilience your guide, then you are already half-way to riding out the next storm that comes your way.
Last but not least, always remember that for all the Hollywood glitz of places like Silicon Valley, there will always be another ecosystem doing things differently, more efficiently, and in a sustainable way.