Being an entrepreneur is an act of both courage and craziness during the best of times. Failure rates of startups are upwards of 90%. In the wake of a historical inflection point, such as the dot com implosion of April 2000, the great recession of 2008-2009 and now, the global COVID-pandemic, challenges increase by orders of magnitude.
When the tectonic plates shift, as they have once per decade since Y2K, all bets are off. Many startups and established businesses struggle to remain relevant as their pre-shift value propositions are rendered irrelevant. If they were fortunate enough to have raised sufficient capital, they may have the opportunity to “stay the course or to pivot”, depending on how significant the shift is for their target market. For those that haven’t, the end is often in sight.
COVID19: A Tectonic Shift Like No Other
When Black Thursday, 12 March 2020 occurred, everything changed for the current crop of startups and private companies with IPO ambitions. Well-funded unicorns like Toast, whose target market is the beleaguered restaurant industry, has struggled. In spite of raising $900M in VC from world-class funds, significant lay-offs were inevitable.
I’ve had direct experience facing the cold hard truth twice, as a C-suite operating executive in pre-revenue startups, but the two outcomes were very different. Facing the truth was very hard, as it always is when you’ve poured your heart and soul into an exciting new project with lots of promise. Based on this first-hand experience, here I share my advice on how to manage the mental toll of ripping it up and starting again.
You Must be Intellectually Honest and Brutally Realistic
Once you’ve processed the initial emotions that come with facing an epic market inflection point, you need to switch your mindset to brutal objectivity, and fast. This first step is arguably the hardest of all, as we’re all so emotionally invested in our products and businesses. And in a crisis like this, it’s even more difficult, given that a viable business model can turn to ash in the space of just a few months.
As we’ve seen in this pandemic, core assumptions evaporate overnight. Uber is pivoting more heavily to food delivery. Professional sports teams need to engage fans digitally. Fitness-oriented businesses must deliver engaging workouts remotely. It doesn’t matter if you were the best at what you did in your category in the recent past. Question – is the category still relevant today?
Don’t rely on the feedback of friends or close associates of the business, as they too could be in denial. Even investors in your business may find it difficult to be completely truthful about their intentions to reinvest, as they’re also sorting out their own portfolios and thinking through triage strategies.
The toughest decision of all is deciding to call it a day if your market has disappeared and shows no signs of returning. I speak from hard-earned personal experience when I say this. Back in 2000 I was an exec of a web-based PC support business that had just raised $75m in one investment round. We were set, until we weren’t.
A few months after our investment round, the dot com bubble imploded. As we let the dust settle, we went back to first principles. The question – were the assumptions that we made when we started this business still valid. The intellectually honest answer was a definite no. We agreed as a team that we would offer our investors their cash back under one condition – they’d pay a reasonable amount of severance to employees who were all about to be laid off.
Of course, not all cases are as drastic as that. Although perhaps you may have to pull back support for existing products or cut off future improvements. That’s never easy to do when your customers were there for you early on and saw you through the early, uncertain phases.
Be intellectually honest and brutally realistic. Do you have the financial, emotional, and physical staying power to fight and win in the new economic landscape? Ask really tough questions, don’t “lead the witness”. Sit back and really listen to what your team thinks. Live in the awkward moment. If you do, you’ll save yourself a lot of time and heartache down the road.
Align or Die – “A House Divided Cannot Stand”
When these massive inflection points occur, you must revisit every assumption you had when you decided to start the company. The team must return to first principles as if you were starting your new venture from a clean sheet of paper. If there’s still a market out there but you need to pivot your product to adjust to the new normal, then unity is essential. As Abraham Lincoln said, “A House Divided Cannot Stand”.
Is there strong agreement as to what needs to be done? One team, one fight. Now, more than ever, everyone, from the Board and investors to the founders, the executive team, and the employees need to be on the same page. If you decide to go pivot hard and go forward through a crisis, you’re in for the fight of your life. You need to be on the same page every step of the way.
Again, I speak from battle-hardened experience with this. I was part of a team developing cloud infrastructure software aimed at taking on the incumbents. However, unbeknown to us, major industry vendors formed a consortium and anointed an open-source project as the new industry standard. In a heartbeat, our technology was rendered obsolete.
Once again, the team convened to revisit our going-in assumptions. Our conclusion – the market was still ripe for disruption. Second, the learning from our abandoned product could be leveraged – we could use the open-source platform that had effectively made our original product obsolete, and build software that could be used in conjunction with this.
However, if you decide to pivot and rebuild, be prepared for a marathon. It’s tough, both mentally and physically. In our case, in order to recover lost ground, we declared a moratorium on vacations. We pretty much worked virtually 7 days a week for a year. Dinner was often brought in so we had more hours free to work. It’s this type of fight that a team faces when in this position, which is why team unity is so vital.
Of course, every situation is different and depends on a wide range of variables. These include cash on hand, the prospects for your product in the new-normal economy, and the support of your investors, shareholders, and board. However, if the current crisis has impacted your business, no matter how severely, the basic principles of intellectual honesty, a cool analytical mind, and team unity are essential when navigating the most suitable course.