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“Leading Your Midstage Startup Through the New Normal”
All startup leaders are currently facing the challenge of leading their company through the new normal of low startup valuations. Valuations started to drop during the second quarter of 2022 and it could take time for the economy to rebound. In the meantime, what are startups supposed to do to make sure they are able to survive these dark days and still put themselves in a position to thrive?
Startup coach Roland Siebelink provides answers to those questions during a 25-minute webinar on getting through the new normal and the best ways for startup founders to lead during this time. The webinar covers five topics that are on the minds of every startup leader, or at least should be on the mind of every startup leader.
What exactly is this new normal?
How long will this new normal last?
How can startup leaders maintain their credibility during this period?
How can startups ensure their survival by focusing on their core?
How can a startup extend its runway by making hard decisions?
Hello and welcome to this webinar about leading your midstage startup through
the new normal. My name is Roland Siebelink and I’m the founder and the CEO of
Midstage Institute, and we help midstage startups thrive through the good and
the bad times. Today, I want to talk about how the world has changed since the
valuation of startups started dropping precipitously in Q2 2022, and what that
means for your startup and how to respond to it.
Let’s get going. The presentation is divided up into five key parts. What is the
new normal? What is it and how long will it last? How do you maintain
credibility as a leader in leading the change? How do you ensure survival of
your startup by focusing on the core? How can you extend your runway, typically
by making some hard decisions? And then also, how can you thrive long-term by
focusing primarily on the differentiation that your startup provides?
Let’s start with section one. What is that new normal and how long will it last?
Just to provide our conclusions a little bit upfront - and I’ll talk about why
in a second - we do think the economy will recover. Inflation will come under
control. But lower valuations for startups will persist for a while. Why do we
think that? Well, the economic fundamentals actually look better at evaluations
at the moment. This is not the 2020 COVID cycle when we were expecting a huge
crisis and valuations turned up higher than before just because so many people
were forced to work from home or learning to work from home; therefore, there
was a big demand for new technology tools. We cannot expect valuations to return
to 2021 levels soon. Also, because of historical benchmarks that we have seen in
the years - for those of us who’ve been around a little bit longer.
The employment statistics, especially around the world, are far more positive
than expected. There were first signs of the US inflation getting under control,
as we’re recording this in September. The last figures were still a little bit
higher than expected but still lower than what was expected about a month or two
ago. I would say even though it’s a little bit slower, these signs of inflation
getting under control are still there. And we have seen some stock market gain,
even some interesting exits from the likes of Figma being bought by Adobe for
double the valuation that they had achieved last year.
However, in general, tech valuations still seem relatively low. That is only low
if you compare that to very recent valuations, such as done in 2021 in the
middle of that COVID boom. What we think often is that it may be just a sign of
them reverting to a longer term average, especially when investors are a little
bit more worried about the value of money in the longer run. And therefore, want
to discount risk more and the opportunity to gain huge revenues in the far
future is worth less than money that will come in sooner. In a way, the new
normal is the old normal pre-2012. Expectations were a bit higher when people
wanted to see money sooner. Generally, startups got a decent valuation but not
crazy valuations like we’ve seen in the last year.
In this case, investors are looking more for actual results over speculative
results. And this is a framework that we sometimes use to explain a little bit
where you play as a tech startup in the minds of investors. To explain this two
by two, we can say that there are only four ways in which investors can see
value being driven by their investees, by their portfolio companies. The
portfolio company can create more upside or can reduce the downside. And both of
these can be split up in speculative ways of reducing downside or increasing the
upside or actual hard number ways. And we think that this is a cycle that
companies go through in their life cycle. In a very early stage, you focus on
the speculative upside, essentially because you have nothing yet, so all you can
do is sell the dream, sell the vision, imagine a world in which we were to
conquer a billion customers and they would each pay us $10 a year - how much
revenue would that be? That is what we call increased opportunities - irrational
exuberance is the code word there.
And many early stage startups, pre-seed startups, play entirely in that field.
Even those that are funded with a lot of backing from startups may for a while
still have a big component in increasing opportunities. After you actually start
selling, then - as every founder knows - suddenly sales become the most
important. What you’re really selling is outsize growth, much faster growth than
what the market will bear or the economy in general. And while you may still
have some increased opportunities in the back of your deck, what investors care
more about is that increase sales, and especially the sales that are coming down
the pike, the growth rate and how far that growth rate can be projected into the
future is the part that investors value very, very highly.
Sometimes that goes so speculative that you’re almost getting back to that top
left quadrant of the irrational exuberance. We will have growth rates doubling
from a very low base but 10 years down the road. That is the part that’s now
getting a little bit less attractive to investors because that money may be
worth a lot less in the future.
This is why in a third phase typically, they are less eager to start paying for
growth. In a time when money stays very valuable over time, just getting people
to buy customers, to spend a lot of customer acquisition costs just to gain
market share is attractive. But if you buy all these customers at a
non-profitable rate and you have no foreseeable path to actually get them to
profitability, soon investors start moving to the third quadrant and they say,
“Can we reduce cost?” It doesn’t mean they don’t wanna see growth anymore. They
just wanna see profitable growth or growth that gets to profitability sooner.
Increasing margins, typically on the customer acquisition cost, and then over
time, some of the overhead and even R&D will also have to live more by their
means, so that the company can get default and afterwards structurally
And only at a very late stage will that reducing cost actually become the main
refrain. Mostly, that is not something we see at startups unless they are in
very big crisis mode. Even then, it’s typically only for a short amount of time
like when a reduction in force needs to happen or the startup needs to reset
itself so that it can focus on growth again. The companies where reducing cost
becomes more the structural part that they play in are the companies that are
more invested by private equity, companies that are in a maturing life cycle
that are losing market share where reducing cost is the game they have to play
to stay alive. Of course, companies that are at the end of the life cycle, often
it is about stable returns, reduce the risks, do not do anything to rock the
boat, which explains the mindset in some of the very mature companies that we
try not to work with and the kind of people that work there like to avoid any
risk to the franchise that they have.
All of these are valid, but for a startup and for a founder, it’s important to
realize where you are playing, can you sell all your valuation purely on the
basis of increased opportunities or are you actually increasing sales? And if
so, can you do that at a profit or at least at reduced cost? That’s the
framework that we want you to keep in mind.
How do you maintain leadership credibility in this new normal phase? For us, it
means that as a CEO, as a founder, you have to show and communicate extensively
how you are learning and adapting. Even if you are yourself still unsure of
exactly what to think and what to do. And it’s perfectly fine to lead the change
with a little bit of vulnerability. That actually helps to maintain your
credibility. Credible leaders do reset their expectations. They embrace this new
normal rather than resisting it. And they learn quickly how to adapt.
What that means is communicating profusely to their teams and with their teams.
Maybe not so much trying to constantly get feedback, but just more top-down,
showing very clearly whatever you’re thinking, what are you working on, what is
a new insight? And this helps a lot. We see a lot of CEOs, for example,
resorting to weekly videos that they send to all of their teams. Nothing planned
or produced, just a few bullet points that they wanna share with their teams so
that people feel like they are in touch with their leaders. They are open about
their uncertainties and are not afraid to feel vulnerable about sharing some of
these uncertainties. But they’re still project big belief in the future so that
people can latch on to that and keep working hard for what will remain a very
attractive company to work for.
A little exercise that we can do here is you, as a founder, as a CEO, as a
startup person, as an executive leader, how would you rate yourself? Have you
reset your expectations? Have you embraced the new normal? Have you learned
quickly or are you learning quickly how to adapt? Are you communicating
profusely with your teams? Are you open with people about your uncertainties?
And do you project belief in the future? Give you a minute to score yourself on
The best CEOs we work with typically score four or five - almost nobody scores
six right from the go get. Of course, we want to get them to a six. Those that
score three or lower should probably talk to their coaches or give us a call and
see how we can work together to get you to that higher level of credibility so
that you can remain in charge of your startup, even through these tougher times.
How do you ensure survival in this winter time? Winter is coming. We’ve been
warned by Game of Thrones about that for a while now. The answer is to strive
for default alive. And how do you do that? By identifying the core of your
products, of your go-to market, and also of your staff or your employees?
Maximizing runway is about realizing that all the dry powder in the world that
VCs are set to have will not save you. This dry powder is - first of all - not
in the bank accounts of the VCs. It’s commitments from other investors, from
limited partners, that might come to the fund if there’s a capital call. But
which VC wants to do a capital call in a crisis? Who wants to come up with a
really speculative investment that all these investors and limited partners will
feel wary about? That simply doesn’t happen at this stage. The dry powder one is
not really there. Second, the VC does not have the power to push for an
investment at this stage. It won’t save you unless you have a very compelling
business that everyone sees based on pure economics is the key to investing.
Preserving cash, therefore, beats growth at this stage. Of course, every startup
is still a growth company, and growth is ultimately what gets investors excited.
But at this stage, having a lot of growth that will drive you to unprofitability
and make you go cash negative there’s no remedy for that. Preserving cash beats
growth if you want to optimize survival.
Reassessing the bottom line contribution. Out of all your projects - if you were
to split them up, do a bit of a waterfall chart - which ones are actually gonna
be contributing significantly to the bottom line of the company, not just the
top line, and which ones are a revenue driver but also a huge cost driver?
Almost always, when we do this exercise with startups, midstage startups, they
will talk about their three business lines, and they will say, “Well, we can’t
really drop any of them because one of them generates 20%, the other 30%, the
other 50% of revenues.” Once you start looking at cost and profit, however, very
often the first one generates 90% of overall profits, the second 10%, and the
third one brings all that profitability down to zero again just by the huge cost
to generate. Those are the ones that we cannot afford at this stage when the
winter is there. And that’s how we want to reassess the bottom line
Can you get to a 24-month runway? That’s what many investors are asking for
right now? How aggressive can you be in slashing your burn and getting up to 24
months that you don’t have to raise money? And how fast is your path after that
to a 30% free cash flow, which is the gold standard of becoming a very
attractive company that is default profitable and can survive by itself.
Extending your runway means dropping the loss leader. I mentioned this example
that we see at many, many startups. For example, the revenue contribution in
this case was 72, 20 and 30. It looked like we cannot cut any of those without
significantly driving down our revenue. However, if you looked at the profit
contribution, you saw that products one and two were actually profitable and
getting to a net income for the company. If only it hadn’t been for product
three, that only basis of just 30% in revenue was generating 90% in cost and
therefore is driving the entire company in cash-negative territory. That’s the
kind of loss leaders we want to identify and then think, can we still afford
Extending the runway until good times return means making the hard decisions.
You have to call C players. You have to let go of the loss leaders that we
mentioned. And also, defund the most speculative ideas that are not yet going to
give you a return in the short term.
Hard decisions. One of the CEOs said hard decisions are like vacuuming; if you
don’t do it often enough, then it just piles up. And in the end, it just becomes
a lot harder. But these times, these crisis times, these difficult times, are
also the best times to sometimes take hard decisions that otherwise wouldn’t
have been acceptable to your team.
Something that you can do really quickly is to call C players. Very often, we
work with clients and have the executive team go through the list of all the
people reporting to them collectively and say, who are the best people that we
have here? Who are those that have had a few warnings about their behavior? Who
are those that are never performing? And can we identify those that do not add
value to the company, maybe add more friction and cost and frustration to the
company? Why are we still having them on the payroll? Wouldn’t it be time to set
them free and let them find a better future somewhere else that’s also better
for their own career?
Letting go of loss leaders. That’s what we talked about in previous sections.
Understanding which product but also sometimes which region or which department
or another activity is causing the company to generate so many costs that
wouldn’t have been necessary if that whole department or product or region did
not exist. Also, defund speculative projects. We see a lot of this in product
and engineering. Things like future product lines, marketing experiments,
long-term learning development, all those investments in the longer-term future
are probably things that we should at least cut for now and wait until the good
times return to start funding again. As Winston Churchill used to say, “Never
let a good crisis go to waste.”
Employee forces or employee groups always have players holding folks back. I
mentioned this already. And the framework we like to apply is, is it people that
exemplify company values or do they act against company values? Also, do they
perform average in this role or do they perform over average in this role? C
players are those that are clearly acting most often against company values and
only perform average in a certain role. I wanna warn against using other
frameworks that people have come up with. The one we see a lot is not just
current performance but also potential. We have not often seen a very objective
assessment of potential in the role. Very often, potential is used more as a way
to express liking or disliking the person. And since it’s often the manager
themselves grading that person, it’s also a way of saying, “Well, they haven’t
performed yet, but I hired them with good insight anyway because I think they
can do better in the future.”
Whether they have potential or not should not be the key question at this stage.
What we should assess is are they performing in the role that we pay them for?
And do they actually fit with the company? If they have more potential, then you
can always put them in a different role and then assess whether in that role
they have the potential. What we cannot afford at this stage is people
underperforming in a job and then saying “Yes, but they might still grow into
it.” Identify those people that act against company values and only
perform average or below in this role, and then wonder why are we holding the
good players in the company back by forcing them to work with these people?
Where do you thrive in the mid to the long term? Assuming you’ve been able to
ensure your survival, assuming you’ve been able to extend your runway by making
the hard decisions, you should have a better feel for what is your true core,
what is the business that is gonna keep putting the bread on the table and how
do you secure that franchise to thrive long term. The key is to optimize that
core for break even and then focus long term investments, not on building new
cores but on further differentiation from potential competitors.
We think that at these stages, optimizing the core should be for break even - or
what Y Combinator calls default alive. If in that very core, you cannot even
make a profit, you have to be very careful in understanding why is my business
model not yet performing? How can we get to at least keeping that default alive?
In your product investments, there’s gonna be some crown jewels, as Geoffrey
Moore calls it. Those are the key parts of your product that deliver the value,
what delivers the aha moment to people. Often, already a source of
differentiation, so do protect those with further investment but minimize and
outsource any activity or feature set that is actually just a
we-also-have-to-do-this activity, something that’s non-differentiated.
Once you’ve been in business for a few years, there’s gonna be customers that
stay with you no matter what. And that’s actually an opportunity - a very well
known strategy - to start milking those older products. What that means is to
defund further investment - do not try to optimize them all the time but just
keep them running at minimum cost. And potentially, you have a chance to start
adding in some price increases. Especially if customers are relatively dependent
on those products, you start having pricing power. And this pricing power can
help you fund future product investments that increase your differentiation.
Try to add fewer people back. You’ve just done a bit of a clean up and gotten
rid of some C players. Don’t try to replace all of them. Just try to pay the
best ones more. Over time, many companies start getting smarter by not throwing
more hot bodies against the problem but trying to identify who’s best at solving
that. And now what do we do to keep those people here and keep them happy?
Ultimately, move the leadership burden from just the founder to the full
executive team. This is something we work on with many startups, helping them
understand let’s have a team run this business. Yes, of course the founder/CEO
is still in charge and makes a call when they cannot agree. But in surprisingly
many cases, people can actually agree, can come up with creative ideas, and
actually can run much of the day-to-day business without the constant
involvement of the founder/CEO. Thereby, liberating her or him to look further
in the future, focus more on bigger strategic partnership, and maybe even work
toward an exit at some point in time.
Some tips on moving that leadership burden from the founder to the executive
team, something we do in many of our workshops. We help the founder write out
the vivid vision. We get executives to buy in and contribute to that vivid
vision. Then we start agreeing on momentous goals. Momentous goals that are on a
three-year time base and breaking that down in one year-time base, and then even
into quarterly OKRs.
As external facilitators, it can be very helpful to do that from a neutral point
of view so that the CEO is not at the same time trying to drive that leadership
burden down and also managing the workshop because that is a little bit
incompatible with each other. We funnel ideas into offsites. In other words, do
not try to jump on every new idea as soon as it comes - oh, we gotta do this,
and there’s another squirrel and another shiny object there. It’s fine to be
creative and keep a list of those ideas. But let’s not prioritize them until
we’re all back together at a new quarterly offsite, and then see which of the
things should drop off of our list compared to this new shiny object that might
actually help the company do better.
We try to put everything together in what we call a one page strategic plan and
then drive out of that a quarterly delivery rhythm. Between those offsites,
everyone is very clear on what needs to be done, who’s gonna be evaluated on
what result, and in the meanwhile, you do not have to worry about new ideas
coming up and having to respond to it.
This is what it looks like; a very simple version - the Verne Harnish version of
the one page strategic plan - starting with core values on the left. And as you
can see, totally breaking that down into the three-year, one-year, and quarterly
plans. And then even breaking that down further into what’s the theme for the
company, as well as my own accountability that comes out of this. We typically
help draw it up 80%, 90% of this in a first workshop. And then it’s all getting
better from there.
Conclusion, leading your midstage startup through the new normal means first
understanding and then embracing what is that new normal. We think the economy
will recover and inflation will get better, but lower valuations will persist
for a while. Do not stick to expectations of 2021 lasting forever. Can you
maintain your leader credibility? Our advice is to show and communicate how to
learn and adapt, even if you are unsure.
Third, what will ensure survival of your startup? Striving for default alive in
the expected phase of no funding is the best way to ensure survival. How can you
then make your runway last longer? Our advice is to call C players, slaughter
some of the sacred cows or the loss leaders, and cut speculative investments
that will only pay off in the long run.
And where do you then thrive in the mid to long term? You optimize for break
even and share the leadership burden with the executive team.
That’s our advice in leading your midstage startup through the new normal. If
you wanna discuss your own startup with us, then feel free to book a call. Our
strategy calls are free and you can book them on www.midstage.org/contact.
Looking forward to talking to you all soon.
Roland Siebelink talks all things tech startup and bring you interviews with
tech cofounders across the world.
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