Are we heading for an economic downturn? That is the topic that OneEleven partner, Silicon Valley Bank tackled for our community last week. As it turns out, predicting a recession is hard. There are potential warning signs; slow GDP growth, falling small business lending, weakened consumer or business spending, but there are few certainties. And while Silicon Valley Bank’s Toronto-based team believes the innovation ecosystem is stronger than ever, the truth is a capital rich environment isn’t always a guarantee. So what does that mean for your business? Here are a few things that startups can do to make sure they can weather a recession or a financial downturn.
Your investors and your banker are the biggest financial partners you have. They can’t help you if they have incomplete information, so get out in front of any issues as quickly as you can, and keep everyone in the loop. You should aim to meet in person with your banking partner and investors on a quarterly basis. It’s a good idea to walk your banking partner through the deck you present at your board meetings.
Perfect your business model
Your business model is always important, but in an economic downturn, the integrity of your model, your cashflow, and your gross margins can be the difference between living or dying.
Get capital when you can
A recession can mean a drying up of liquidity in the market. Venture funds will begin to divert resources to their top performing portfolio companies, decreasing the number of new investments. Make sure you have the runway to survive if investment dollars are not flowing and if lenders are required to cut back on their lines and facilities. Plan your raise far in advance and when you have the metrics to support. It will take longer than you think it will.
Have a plan for a down round
Valuations are directly tied to public company performance. In the case of an economic downturn, market caps drop. As a result, there is a chance that your company will in-turn experience a drop in valuation. Down rounds are unpleasant. It means shares in the company are eroded, and the brunt of this hit is usually faced by the founders and employees because investors have protection against such situations thanks to anti-dilution clauses.
Make tactical cuts
All of the above could culminate in having to carry out some spending cuts, and ultimately layoffs. While you should not expect this to happen to you, be prepared for it. Have a plan in place, find mentors to guide you through the process, and think about what you have to do to keep the business alive.
Predicting a recession is easier said than done, but being prepared for one is good business practice. A big thanks to Tony Barkett and Laith Shukri from Silicon Valley Bank for sharing their insights and walking our founders through how to batten down the hatches during an economic storm.