How should businesses approach growth now that the economy has shifted from a boom to a bust?
Businesses across the globe are struggling to manage their financial goals amidst the current turbulent market conditions. Despite growing uncertainty, companies should focus on identifying where to invest and cut back inside their organizations to explore untapped revenue sources.
Terese Hougaard, Partner at Atomico, joined Julio Martinez, Abacum's CEO, to discuss how to advise startups and founders on growth strategies today. Together, they agreed on the fact that there is no single strategy that will guarantee success under every scenario. Instead, a good starting point is to develop a long-term framework and build tactics around your fundamentals to adapt to changing circumstances.
Julio: How did you make your way to become a partner at Atomico after having spent time at Google and CapitalG with an impressive track record as a marketing operator?
Terese: I was fascinated by tech and innovation, especially by how fast-moving the industry is. I was very lucky to get a job at Google and to work in marketing after having worked in payments before.
Even though I have always been fascinated by startups, back then I didn’t understand how they grow or how they get funding. Fortunately, the term "venture capital" came across, and I learned everything about it and worked for CapitalG, a Google investment fund, after working in marketing.
From 2015 to 2020, I worked on the operational side with founders and startups, learning about all the different challenges they face every day. However, as a European, I was constantly watching what was happening in Europe and observing how the startup ecosystem was becoming stronger than ever.
The excitement of what was happening in Europe made me think of moving back and joining Atomico. At that moment, I was looking for a fund that not only helped founders as passive investors but also operationally, and I felt Atomico was a perfect fit.
Julio: Looking back, what are some of the early lessons from being in marketing that help you advise startups and founders on Go-to-Market strategies today?
Terese: After working primarily with B2B companies, I realized that one of the key lessons is not to ignore marketing. It can sound simple, but B2B businesses sometimes forget how important this is.
I think marketing is all about figuring out who your customer is, what their core behaviors are, and what they care about. And hence ensuring that the product you are creating meets your customers’ profile and needs.
It is critical to think about the fundamentals of your company towards your core personas when starting, especially in uncertain times, as your customers may change as the market changes.
Julio: We are halfway through Q3. How are you seeing founders react and adjust their H2 business plans in light of the current market environment?
Terese: I have seen a few different reactions with everything going on. The first one focuses on managing burn rate and cash runway. Everyone is talking about how important it is to ensure you have enough money in your bank to survive.
The second one is more focused on building a healthy company by having the fundamentals in place. So, for example, if we think about the SaaS world, companies are thinking about having strong customer retention and ACVs to expand their businesses in the long term.
In the last few years, there has been a lot of capital in the market. As a result, startups and investors have focused less on the core pillars when making decisions. Now, we are back to those fundamentals, which I think is good. I believe going back is positive, especially in today’s market conditions, as healthier companies will be built.
The current market situation implies making hard decisions. However, I believe that in the future we will look back and think that those corrections were the starting point for a healthier environment.
Julio: How would you advise founders to approach headcount and talent density decisions? When looking at the different strategies, what do you see most often? Reducing salaries, changes in comp structure, or headcount reductions?
Terese: This is a hard topic because talking about headcount, at the end of the day, is talking about people. The same people who make up your company as a founder.
The strategies to reduce headcount are painful, but often extremely necessary. What strategy a company will follow depends on the context.
Comp changes may be the right route to go, but they tend to be harder as it hits into the fundamental culture of a company. On the other hand, headcount reductions certainly have an impact as well, and they seem to be the strategy right now, as we are seeing many tech companies letting their employees go.
The way I think about advising companies is making the necessary hard decisions, but doing so with as much empathy as possible. I consider it essential to reflect on what you need to have versus what is nice to have.
While thinking about your current and future workforce, I would recommend being vigilant around the extra people to hire and focusing on the game changers that will truly make an impact on your revenue.
Julio: What is some of the advice you are giving companies on OPEX cost-cutting?
Terese: I would suggest reducing excesses like fancy offices. Which again, goes back to focusing on what you need versus what is nice to have.
I would say it is also important to focus on not sacrificing your culture and invest in activities, such as offsites, to create team bonding.
In addition, I think communication plays a major role in difficult times. I believe that if, as a founder, you speak to your employees and explain to them the situation and the decisions you have made, most people will understand.
Julio: When thinking about runway and funding optionality, what strategies and options should founders consider? How many months of runway are you advising founders to optimize for?
Terese: There was a stake in the ground for 24 months, but it depends on the company.
For example, if you are a company that needs to raise funds in two months, of course, you won’t be able to suddenly extend your runway for 24 months. Thus I think the 24 months parameter is a reminder for you to make sure you have enough time to get to the desired valuation.
Besides, what is crucial is to not just think about runway, but also think about runway’s sibling: revenue.
In recent years, we have seen a decline in revenue multiples due to market conditions. As a result, companies now need more revenue than before to reach meaningful valuations. Businesses today are extending their runways to have more time to get the revenue they need to reach their expected valuation.
Thinking about revenue in conjunction with runway is key. A nice little trick is to start measuring your burn multiple, which effectively looks at the cash you burn and how much revenue you generate.
Julio: When considering the different strategies, what do you think of the trade-offs between cash management vs Venture Debt vs VC? What are you seeing that is becoming the norm?
Terese: All of them. Companies are exploring all options, which is the right thing to do as all of them have benefits and drawbacks.
As a founder, you want to ensure that you are building a healthy company with a good runway. So I think cash management would be my suggestion as the first thing to consider.
However, again, it depends on the circumstances. For example, if you are a company that is running out of cash in a couple of months, managing your cash probably won’t be an easy option. Then, exploring venture debt or the possibility of raising a new round can be a great way to get extra capital on board, and hence, gain time to increase your revenue.
Another common strategy is to manage your cash and extend your runway, while also looking into either venture debt or VCs for some extra security buffer.
Julio: How do you advise companies on thinking about growth versus cost reduction? How do you manage conversations when founders need to adjust their growth targets?
Terese: This is the other side of the coin and one of the hardest things to figure out because by reducing spending, your growth rate will be impacted.
I think it is vital to understand the core of your business and identify what is working and what is not. I tend to think about the areas with a repeatable process that help generate revenue. Then, put money against those playbooks that are creating some sort of flywheel effect, to create disproportionate ROI in terms of revenue.
Although knowing where to reduce without cutting back the actual growth is a difficult thing to do, you will eventually want to have open conversations about it with your board.
Julio: We have talked about focusing and accomplishing more with less. How do you see founders learning which areas to invest in versus where to cut back on? What did you learn from having this kind of conversation, and what are you advising?
Terese: Firstly, all is about knowing your customers and how they change with the market conditions. Founders must revise their fundamentals and ask themselves what their business really needs. They must think of one or two things that have the potential to help their company grow.
Secondly, I would say that it is essential to test fast to see whether it makes sense to continue investing time in some projects since not all initiatives will necessarily work.
Julio: One last question to finish. What is the most relevant book you have ever read?
Terese: That is a good question, and I am not going to give you one book, but rather a genre.
I feel that in both VC and startup worlds, there is a tendency to read a lot of nonfiction. For example, the latest book from Silicon Valley or books on how to hyper-grow. Even though I deeply respect all these wonderful and practical learnings, I think we sometimes forget to stretch our minds and get out of the context in which we live.
It is a personal opinion, and one of my favorite genres is fiction. A lot of fiction is about people, emotions, and relationships, which are also topics that apply to business. I believe this genre allows you to switch contexts, use your imagination and get new ideas from a different perspective.
As a leader in your organization, now is the time to take a hard look at your overall operations to identify what is working and what is not, especially while in the middle of an economic downturn. By taking a more strategic approach to business planning, you and your team will be able to identify areas of opportunity to not only weather the storm ahead, but to come out on the other side victorious.
A top priority all business leaders should be focusing on is how to improve efficiency for their organization. One of the easiest ways to do this is by building a solid tech stack that provides all teams with greater visibility into the overall health of the organization.
Abacum is a robust financial planning and analysis software that allows finance teams to derive insights to support strategic decision-making, which is especially important during times of uncertainty.
If you are looking to improve your company’s financial processes and better prepare for the future, book a demo today to see how Abacum can help.
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