The 4 Startup States During a Recession

As the fiscal quarters of many startups draw to a close, board members and management teams are having one of four conversations: The World is Your Oyster, Time to Strategize, Chewing Gravel, or Go Big/Go Profitable.

Here’s how these scenarios fall onto a 2×2 matrix. The x-axis is the Zero Cash Date: when the startup runs out of money. The y-axis is sales efficiency: a proxy for product-market fit (PMF). Typically, most startups selling into the small-and-medium business segment would like to be in 14-18 months’ payback. Enterprise startups should be between 18-28 months.

Chewing Gravel: the startup hasn’t attained efficient commercial success yet and its bank account implies zero cash in less than 12 months. This is the hardest place to be. The company likely needs 1-2 quarters to develop a product and then 2 quarters to book business. Options include selling the business, raising an inside round, or all-out-sprint to save the business.

Time to Strategize: with a long runway but lacking product-market fit, the startup possesses the resources to scale. The north star should be efficiency. Minimize burn to lengthen runway and develop both the product and go-to-market efficiently.

Go Big or Go Profitable: customers want the product and the company has faith that bookings and churn won’t suffer in a downturn. You have a choice: Push to profitability; sacrifice growth for total control over your destiny. Or raise capital despite uncertain market to prioritize growth. Many of these businesses should find success in the fundraising market, but at different terms than a quarter ago.

The World is Your Oyster: spend a dollar and generate more than $0.70 in gross profit? Have plenty of cash? You’re in Position A, the top right of this quadrant. Full speed ahead.

An essential ingredient to deciding 2022 strategy is the answer to: will our business be impacted by a US recession? Will buyers slow processes, exert greater pressure on pricing, or look to opt out of contracts?

I haven’t seen a broad shift in purchasing behavior in the market yet, which is encouraging, but keep a vigil. Markets reverse in a moment.

Some startups may find themselves in between this neat quartet of states. Take the more conservative view. If the markets roar back, you’ll have an efficient business that can grow faster with more capital.

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