Five founders on the downturn

Every startup handles difficult environments differently. We spoke with five startups — across industries and stages — about the possibility of a downturn and what it might mean for their plans in 2022 and onwards.

Waseem Daher, CEO and co-founder, Pilot

• Total funding: $161.3M
• Most recent round: $60M Series C, January 2021
• Select investors: Stripe, Sequoia Capital, Bezos Expeditions, Index Ventures, Whale Rock Capital Management
• Team size: 376
• What they do: Pilot provides finance, accounting, and tax services for startups and growing businesses.

"Stay on top of your key metrics. If they're trending in a way you don't expect, you need to be able to react quickly. To enable this, do some preplanning: hold hands with your exec team and say — hey, if we're off plan by this amount, this is what we're going to have to do. If your new MRR dropped by 50% this month, what would you do? Rapid decision-making is so key when environments are uncertain or unstable.

Yes, it's easy to ignore your metrics and to instead work on building that new feature, but that's a mistake. Determine what numbers capture your business's health and make sure you have a good finger on their pulses.

As an example, if you ask me right now: what's Pilot's cash in the bank? What's its burn rate? What is new revenue added this month? I can tell you all of those things off the top of my head. I scrutinize them regularly."

Kyle Mack, CEO and co-founder, Middesk

• Total funding: $77M
• Most recent round: $57M Series B, June 2022
• Select investors: Canapi Ventures, Insight Partners, Accel, Sequoia Capital, Y Combinator
• Team size: 80
• What they do: Middesk is a business identity platform that helps B2B businesses verify their customers.

"We've decided to focus on the fundamentals of the business — for example, how are we going to grow the company? How are we going to be aware of how much we’re spending? How are we going to chart a path to reduce as much dependence on VC money over time as possible?

It's been easy for companies to not have to make hard decisions over the last five years. When we went out to do our fundraise earlier this year, we were talking about having to use capital to get you to a set of growth milestones that are maybe 5-10x where you are today. When you go out to fundraise now, that number might be 20-30x. Companies are having to think about what it means to hit their goals with the same amount of capital in the bank.

The rhythm of the company is really important to try and nail. In a perfect world, you can identify things that are working as soon as possible and do more of those things. And you can identify things that are not working as soon as possible and course correct.

But doing that relies on an operating cadence and operating model – the goals, the meetings, the tools, the reporting, and the set of conversations that you have using all of that stuff.

I look to Max Rhodes, the CEO of Faire, who is great at the kind of operating model we’re talking about. And I also look to my network of first-time founders and other founders who have gone through some of these periods to understand what’s going on."

Byrne Hobart, founder, The Diff

• Total funding: $0
• Most recent round: N/A
• Select investors: N/A
• Team size: 2
• What they do: The Diff is a newsletter tracking inflections in finance and tech.

"I think newsletter subscriptions have really slowed down. I've talked to other people in the industry and they've seen similar things. One of my friends insists that subscriptions started dropping right after Ukraine. It’s a combination of that, inflation, the market being down, and maybe people moving back to normal life and normal media consumption patterns. They're not reading newsletters as much.

But though the growth curve has slowed down, the steady state is still really good. I want to make sure the newsletter is valuable and I can infer that it's valuable from the fact that people pay for it. But I do try to gut check when I’m writing something — will this help someone make a better financial or career or strategic decision once they read it?

I charge $200 a year. Even if there's a really tough recession — if unemployment goes up to 10% — 90% of people are still employed. So 90% of people are not going to face these really tough constraints where they are watching every dollar and have to cut their subscriptions.

When there’s a recession, you also want to act a bit more professional. In a content business, one of the things that means is just being more careful about errors, being more careful about editing, and just making sure that someone doesn't have an excuse to ask themselves: Am I paying $x a month to read something with typos?

Companies typically get more casual when times are really good, they have casual Fridays. And then, the suit comes back during recessions. When Mark Zuckerberg said that he was going to spend a year wearing a tie every day, it was 2009, and it was a symbol that Facebook had to think of itself like a serious business and not just a side project."

JJ Tang, COO and co-founder, Rootly

• Total funding: $3.2M
• Most recent round: $3.2M seed, July 2021
• Select investors: XYZ Venture Capital, 8VC, Y Combinator
• Team size: 11
• What they do: Rootly is an incident management platform on Slack that helps automate manual admin work during incidents.

"We don't read too much whether or not a downturn is happening — that matters a lot less because we sell B2B. The real question is on our customers’ propensity to spend, whether it’s going down or if people are freezing their budgets, wanting to buy less, wanting to expand.

Fortunately our financials are healthy and rapidly-growing, and we have a lot of runway. We want to continue snagging logos in an emerging segment, so we might consider creative commercial agreements that help our customers, like payment terms that fits their business as it adjusts to the new realities.

We see a lot of customers whose procurement departments are like 'stop spending or lower spending.' But it’s incorrect to just assume all companies will stop spending. We've seen companies where the stock prices will dip 80% and they've become one of our top 10 customers overnight. The propensity to spend is still there. You have to keep pushing until you run into those roadblocks instead of selling yourself short.

We think a lot about this advice from Y Combinator — always think about yourself as default alive or default dead.

Default dead: if you take in no new capital today — or ever — will your company survive? Or are you just going to burn $50M into the ground? It doesn’t matter how many cool logos you have. Default alive: the team is very clear what our goals are and what we have to do to hit that. And you’ll make it to profitability with the money we have left. We always want to check that we’re default alive."

Jake Disraeli, CEO and co-founder, Treet

• Total funding: $2.8M
• Most recent round: $2.8M seed, July 2021
• Select investors: Techstars, BBG Ventures, Green Meadow Ventures
• Team size: 13
• What they do: Treet helps brands set up resale sites where buyers and sellers can list items.

"We’re pulling back in a number of areas and just trying to be really smart about those key hires that we absolutely need right now — it's not growth at all costs, but we still need to grow. We still need to show month-over-month growth and really can't afford to slow down too much in terms of revenue and customer acquisition.

We're prioritizing investing more into sales over other lead generation efforts. We're building a repeatable sales engine where we're launching a growing number of brands each month. We’ve hired two SDRs and we’ll probably hire two more over the next few months. If the market conditions were different, we might be hiring a lot more. Hiring in small groups allows us to test our repeatable sales process. We’d like to show CAC payback per cohort of hires before scaling up.

We've been hearing advice that startups should have 30+ months of runway — a year ago, you could get away with raising your next round when you have six months of runway. That’s no longer the case.

We want to make sure that we shore up our burn rate and that we have enough cash in the bank to weather the uncertainty. We want to prioritize ruthlessly and be very cautious with what we invest in, who and how many people we hire, which events we invest in, and which marketing bets we're making.

Our investors are our advisors. And they’re the ones who’ve been giving us the most guidance."